Here’s the cleaned-up transcript:

So when you find yourself with a business that is consistent, solid recurring or reoccurring revenues, John, those businesses could trade double and triple what a business that has one time revenue.

This podcast is brought to you by Fast Slow Motion, a team of expert consultants that have helped hundreds of growing businesses build scalable systems on the HubSpot and Salesforce platforms. To learn more, visit fastslowmotion.com. Welcome to the Fast Slow Motion podcast, where we teach you how to build a business you love while enjoying your life. I’m your host, Sam Donaghey, and today we’re joined by two remarkable individuals whose combined expertise spans the worlds of entrepreneurship, investment banking, and business operations.

We’ve got Zane Tarence — Zane is a partner and managing director of Founders Advisors, a merger and acquisition firm serving middle market companies in a wide variety of industries, which has orchestrated more than 80 tech-related deals with institutional buyers. Zane himself has founded and sold two successful technology businesses and brings that unique perspective to his investment banking practice. In addition, he is the founder of — excuse my British accent — Silicon Y’all, a software as a service and internet summit where successful owners and professional investors share insights, best practices, and southern hospitality. Zane is also the author of a book called 17 Reasons Your Company Is Not Investment Grade and What to Do About It. You can find resources for that at www.17-reasons.com.

In today’s episode, we’ll dive deep into some of those reasons you’ll find in the book. We’re also joined by John Burdett, the founder of Fast Slow Motion, a company that has helped nearly 1,000 business owners create transformational change by implementing scalable business operations built on platforms such as Salesforce and HubSpot. So John, Zane, thanks so much to both of you for being here today.

John: Awesome. Sam, thank you very much. And Zane, thank you for joining us. We look forward to learning a lot from you. You and I have been friends for over 20 plus years now, so it means we’re both getting pretty old, I think — that’s what that means. But we’ve been through a lot together. Zane has seen me at my worst, and seen me mature and grow, and has been a good mentor and friend. So thank you for that first and foremost. I look forward to our audience learning a lot from you, just like I’ve learned a lot from you over those 20 years. You have an awesome story, to say the least. I’d love for them to hear your story of coming out of school, going to IBM, starting a company — and like, how in the world did you end up in investment banking, and why are you passionate about helping businesses like you do?

Zane: John, thank you. And thank you for our friendship. I was looking today — 22 years that I’ve known you. I think I met you when you were 25. And what you taught me in processes and systems and scalability — John, that’s what I’ve learned from you, and I’m so grateful. So thank you for letting me be on this.

I’ll just very quickly grab my background. I have a strange background. I shouldn’t really be an investment banker — some people still say I’m an imposter — but I think I have a unique view of it. I went to school at Auburn and started co-oping with IBM. Stayed with IBM for 12 years. When I graduated, I started with IBM. I love that business. My twin daughters that are 26 really don’t know much about who IBM is, but back in the old days, I think they really created the computing industry, the IT industry. I learned so much about being with a big company.

But I had the opportunity to take a product that we had built at IBM, when I was with IBM Corporate Services, and start a business called Virtual Learning Technologies. I ran that business for three years. We had built a product at IBM for Federal Express to do web-based testing. Web-based testing — that’s no big deal now. Well, in 1995, the web browser had just really come out in 1994. We had built a way to take an assessment or a survey online versus getting that number-two pencil where you circled the dots. So we invented that. IBM gave it to me, deeded it over to us, and let us become entrepreneurs. They ended up funding my business. Three years into it — I’ve learned so much, John — my ability to manage developers is not really that good. We ended up having 45 software developers. We ended up getting a patent on web-based testing. My investors came in one day and said, “Zane, you’re not a very good operator. You need to sell this business.”

I didn’t know what an investment banker was, but they invited one — Chip Porter — to our board meeting. We ended up doing a process of selling the business. And John and Sam, I thought I’d missed my calling. I had no idea this investment banking market existed until I went on a physical roadshow with my banker. We ended up getting five offers — three from publicly traded companies, two from private equity groups. We sold it to Houghton Mifflin in 2000. I worked with them for a year, and then I didn’t really want to move to Boston, but we made our earn-out — John, you know about those earn-out deals — and I left on good terms with them.

Then I started a VC model incubator, and this is where I met John. The company John was working with, CTS, we jumped over to kind of continue to help grow that business. I was kind of the business development person, also looking at commercialization. I worked there with John. I had a wonderful time. And then, I still had an incubator — a venture capital model incubator that I started to help software companies grow. We were kind of doing that within CTS. And then CTS kind of outgrew its phase. John and the team ended up doing a deal there.

And then I started Founders Advisors eight to ten years ago. I was on the board with my partner Duane. He said, “Man, why don’t you come over and be a river guide for other entrepreneurs?” And John, I said, “Man, I didn’t go to Harvard, Yale, or Princeton. I don’t know if I’m really qualified to do that.” He said, “I think you’d be a good river guide because you are an entrepreneur. You’ve raised a lot of capital. You’ve done a few deals — come over.” And then, John and Sam, I came over here and had the time of my life. A lot of smart bankers. I’m kind of Uncle Zane — the guy that sits on the operator’s side of the table. I understand what it takes to build an exceptional company. But we get to work with entrepreneurs now to help them find the right capital sources along the journey, to make sure they can achieve their vision.

So I hope I didn’t go too long, but I think I have a unique perspective as an operator first. And then I’ve been heavily in the deal business for really 20 years — when I was in the VC model incubator as an operator as well. That’s where I find myself nowadays. And what I love to do today in my life is really just serve owners, to try to make the journey of entrepreneurship more fun, but also give them information. I’ve always believed entrepreneurs are at an information disadvantage when it comes to capital markets. So that’s my background and that’s a little bit of the way I see the world.

John: Yeah. I love that. Knowing you so well now — it’s like God built you to do this role today, and He prepared you for that. And we talk about it a lot at Fast Slow Motion: work is a good thing. Work is fun. And you shouldn’t have to sacrifice enjoying life as part of work. When you’re doing what you’re called to do, you can find good ways to make a lot of money, which is a lot of fun — you know, it’s not fun to not make money. And there’s nothing wrong with making money. But you also get to do what you’re called to do, which is a blessing in itself. And then it never really feels like work.

Well said. So let’s flip over to your book, because I want to spend a lot of time here. First and foremost, I love your book. I think it’s a must-read for any business owner or entrepreneur, whether you want to sell your company or not. It’s about really building a real business that you love and that creates a lot of value. And if you want to keep it, you’re going to get all the dividends from that. And if you want to sell it one day, you can. Because the reality is we’re all going to exit our business one day — some of us will choose to and some of us won’t. But you’re either going to die in the business, go out of business, sell the business, or transfer it to the next generation.

But I love that in the introduction of your book you use a phrase: “Own on purpose” — O-W-N on purpose. Where did that come from, and what does it really mean?

Zane: John, thank you for noticing that. I don’t get a lot of people that pick that up — “Own on purpose.” I named it that because I think our businesses, as you mentioned, are truly a gift. They’re a blessing. The number of people that you get to interact with — all your stakeholders, your clients, your suppliers, your employees, your bankers, your providers of insurance and services — it is an unbelievable opportunity to do this intentionally. And so what I really want to encourage — first of all, myself — because sometimes, you know, I don’t hold myself accountable enough for this blessing. I want to own my business and be an investor like I am in a lot of businesses. Own on purpose, because I do think there’s a stewardship element here. And what a gift. So really, John, that was just a play on words to say: be intentional. Think about every family I affect every day, every person out there. It’s an unbelievable platform to be intentional.

Sam: So let’s get into a couple of the reasons highlighted in your book. And once again, highly recommend everybody check it out. It’s a great book, and it’s one of those things where you can pick chapters and move around, but I highly recommend reading it cover to cover because everything is very, very important.

One of the big ones — and it’s your first, the first chapter — and you spend a lot of time on it. I think it’s well over an hour and a half on Audible and it’s filled with nuggets of wisdom along the way. But it’s so important, and it seems so obvious, but it’s really hard to do in practice. Reason number one: your company lacks recurring revenue, so cash flow is unpredictable. It’s all about predictable cash flow. Tell us a little bit about that — why it’s important, what predictable revenue looks like, and why we need to focus on it no matter what type of business we have.

Zane: Yeah. And John, thank you for that question. As you said, this is common sense. But my problem is always closing the gap between what I know and what I do. When you start talking to institutional investors or buyers — people that value private companies or public companies — this is one of the number one things they focus on. All these reasons are common sense. I’m just pulling them out from really 24 years of due diligence experience, watching these buyers do due diligence.

The quality of your earnings — nobody wants a business, and you shouldn’t want it either as the owner, if you don’t have predictable cash flow. If every month you’re praying, “Lord, please give me a deal so I can pay payroll” — that is a stressful rollercoaster. Investors don’t want that either. If you listen to earnings calls of public companies, mainly they’re talking about how predictable your revenues are. Here’s what you said your earnings would be 90 days ago, here’s what you’re saying they’re going to be — let’s check the predictability and forecast-ability of your cash flow.

So when you find yourself with a business that is consistent, solid, recurring or reoccurring revenues, John, those businesses can trade double and triple what a business with one-time revenue does. So the one continuum I would draw goes from one-time revenue — if you’re a project-based business, a consulting business that does projects, an investment bank that gets paid on transactions — you can get things to move your one-time revenue a little closer to reoccurring and recurring. But the more you move down that line, the better business you have and therefore the more valuable it is.

And John, I would just say — look around at business models today. When you’re running around town or traveling, look at the number of businesses that are trying to create predictable cash flow. A movie theater selling subscriptions to be able to pick your own seating, pay $39 a month, see movies first, skip the lines. Car washes asking you to subscribe monthly. I can promise you, John — like we were talking last week — a private equity group owns that car wash because they want to get you to sign up to a subscription.

And not talking about a lot of money — consulting as a service, when you can build yourself into the budgets of the client because you have such product-market fit that they need you — that creates a recurring stream of revenue. It makes your business worth double or triple what it would be if it wasn’t.

John: Yeah, and it adds value to the client too. In our world, we call it “consulting as a service.” They’re able to have predictable cash flows and expenses on their side — so it’s not time and materials going up and down, and they’re not worried about how many hours we’re logging. And we’re able to dedicate the same team to them, so the same people are around. They’re not having to reeducate different people coming on.

One thing I like to think about is getting creative around how you can build more predictability in your business revenue without losing your focus or drifting away from your purpose. Because there’s this mentality — and you and I have talked about it a million times — where services companies want to become product companies, and product companies want to become services companies. Those are very different business models, and very rarely do you succeed at both. So be true to yourself, who you are and who you want to become. But find ways to make it more predictable, because when you’re feeling that frustration of “it seems so hard for me to make a dollar compared to somebody else,” you need to get creative around how to make it easier to make a dollar while you fulfill your mission and keep your employees and clients happy.

Zane: John, I love it. And I’m going to say one more thing — I think you were actually the first person I heard say “CaaS — consulting as a service.” I go all over the country now preaching that. I should have given you credit.

But John, you mentioned that huge point: it’s actually better for your clients. They know they have your team, they have availability, they’re not scared. They don’t have to worry about picking up the phone on a project and spending a ton of money when they need something for their business. They can budget it. It’s actually a wonderful business model for clients also. A subscriber will give you continual feedback. It takes the lumps out of seasonality, and it allows you as a provider to make sure you’re staffing appropriately to give them what they need at the right time. So I think it’s good for all stakeholders — and it just happens to triple the value of your business.

Sam: That’s so good. We could spend all day on that. So let’s move on. Another reason — reason two in your book: your company lacks a healthy growth rate and sufficient scale. It’s all about growth. That’s obviously something we’re passionate about here at Fast Slow Motion — helping small businesses become big businesses, and helping them grow and scale, most importantly the right way. So help us understand why growth is important, why it’s not a bad thing but a good thing, and why it’s so important that you’re growing and not just maintaining the status quo.

Zane: John, I love this. Again, it comes right back at me. There have been certain seasons in my life where honestly, growth was just hard, and I gave myself a little bit of an excuse. Like, “It’s not about growth — all those people talking about growth at all costs…” But John, it was really an excuse. Because healthy people grow. Healthy families grow spiritually. Healthy businesses grow. And investors know this.

Now here’s the key: grow how? You grow faster compared to your cohorts, your industry, and your competitors. So make sure when you’re looking at these 17 reasons, you look at them relative to your cohort. I always use this example: if I enter a CrossFit competition with 28-year-olds, or with someone 15 years younger than me — that’s not smart. That’s not who I should rank myself with. I’m in the masters division. I’ll rank myself against 59 to 61-year-olds. Same thing here. But if you’re not growing as fast as your cohort — if there are publicly traded companies in your space and you don’t know how fast everyone is growing — you’re being a fuzzy thinker.

So investors look at growth. And here’s the two things I always say, John: is it revenue growth top-line, or is it profitability? Those are different things. And we know if you grow really fast as a business, it’s going to destroy your income statement. So there’s a relationship between revenue growth — CAGR, cumulative annual growth rate — and your profitability.

What we want to see is those numbers related to each other. In your space, probably 33, 34 is where you add your growth rate percentage and your gross margin percentage together. If you were at $10 million last year, $12 million this year — you grew 20%. Add that to 40% gross margin — that’s 60%. If that number equals 33–34% in your industry, SaaS industry that’s 40. You could be growing 40% and breaking even, and if your year-end economics are okay, that’s fine because you’re grabbing market share. So it’s balanced growth. It’s critical. Investors love it. And as entrepreneurs, if we don’t have pinpointed, simple — no more than three — growth strategies every year, we’re not being responsible. You can even have just one, and make sure your organization knows what that growth strategy is.

I’ve got to say one thing on resilience. I’m seeing more and more entrepreneurs — and John, I know this is a safe place — people my age. There are a lot of business owners my age that start not having the same energy and drive to work to grow because, hey, they’ve kind of made it. They’re fine financially. Guess what? That’s irresponsible to your team. Your team of A players wants to be on a growing, winning team because that equals their opportunity. So I’m going to say to myself and to the other people my age: even though you’re okay financially, if you love your people, you will put your company in a position to grow — because their families, their opportunities, their development, depend on you growing.

Sorry to get emotional about that. I’ve had so many people my age lately say, “I’m fine.”

Sam: Is there a timeframe that you want to see on paper as well, Zane — for how long a company has been growing before they’re considered investment grade?

Zane: It’s really just up and to the right, Sam. That’s a great question. People say, “Oh, I had a bad year last year.” That’s okay. Sometimes my marriage of 36 years has a tough season. But it’s up and down — a lot like the stock market. If you draw a regression line, is your business up and to the right? So I don’t really care about a specific timeframe. We really look over three years. I just want to see — even though you hit step functions — that you’ve got this trajectory of getting better and better.

Sam: Did I hear you say correctly that sometimes a sharp spike of growth is actually not a good indication that a company is a good investment?

Zane: If it gets you unbalanced. Here’s the key: if you have that sharp growth, know why. Know what the risk is, or how it’s going to affect your infrastructure and your staffing. I’ve seen too many owners — including myself early on, even as a board member — where we’re like, “Oh, we’re growing so fast,” and when it really got down to it, we didn’t know why. That scares investors to death. If you listen to a publicly traded company’s earnings call and one of the investors or hedge funds says, “Hey, why did you grow so fast last quarter?” and they don’t have a really logic-based, data-based answer — that’s really bad, even if you’re growing really fast. Because something else could be happening in the background that could ruin your business. So great question: if you’re having spikes, know why. And know how that ripples through your income statement and your balance sheet.

Sam: That’s so good. Winning and not knowing why is just as dangerous as losing and not knowing why — because you can’t repeat it.

And it’s interesting in the current environment. We came off a period over the last 10 to 15 years with SaaS companies where it was all about growth. “Grow at all costs” was kind of the mantra. And now that the economy has had some headwinds — interest rates going up, inflation — it’s kind of a turn back to profitability. You need both. You need to grow and have profit. But the mix of those ratios is going to change. You want to know — like you said — to add them together to determine what the proper growth and profitability mix is for your company.

For those of you that are interested, there’s been an amazing case study with Salesforce over the last 12 to 18 months. Historically, they’ve grown 30 to 40% and not had a ton of profit margin. Then they flipped that the other way — now they’re growing at 10% and their profit margin is around 30%. John, what happened to their stock?

John: Through the roof. We’re paying a dividend now. It’s going crazy.

Sam: So yeah — if you’re interested in this topic and hearing it from a SaaS publicly traded company, go listen to those earnings calls because it’s been a case study in that transition. And that’s more of the environment that we’re living in now, which is good.

One thing that came to mind is a quote from Truett Cathy: “If we focus on getting better, our customers will demand that we get bigger.” It’s all about doing things — growing for the right reasons. And I love bringing that up. That’s the main reason we want to grow at Fast Slow Motion — we feel like there are more people out there that we can help and serve. That’s why we get out of bed in the morning. But equally important, we want to create opportunities for our team members. I want to grow people up so they stay and don’t leave. And if I’m not growing, those great people are going to exit — because they’re great people and they want to grow and get better.

Zane: That’s right. And John, I’ve got another point on that. You alluded to my three favorite words: product-market fit. Service-market fit. Product-market fit. When you achieve that — like Chick-fil-A did, like you guys have — you give amazing value to the stakeholder. Morally, you need to scale. Morally, you need to scale. How many companies have you seen, John and Sam, that have a great product, a great service, and they actually cannot scale to truly deliver it? I think it’s our responsibility — when you get that product-market fit — to be able to scale. And the market will draw you. The market will pull you toward growth. And if you can’t do that, it’s very, very sad.

Sam: Zane, John, this has been such a great conversation so far, and you’ve given us so much wisdom about how to build a strong, investment-grade business. We look forward to diving into the rest of it with both of you. To our listeners, be sure to tune in to part two of our conversation with Zane. And remember to subscribe to the podcast on your favorite podcast platform, or you can find archived episodes at fastslowmotion.com/podcast.