Ep649: Damon Pistulka – Be Careful of Concentration Risk

Andrew Stotz 00:02
Hello fellow risk takers and welcome to my worst investment ever stories of loss to keep you winning in our community we know that to win in investing, you must take risks but to win big, you've got to reduce it ladies and gentlemen, I'm on a mission to help 1 million people reduce risk in their lives to join me go to my worst investment ever.com and sign up for my free weekly become a better investor newsletter where I share how to reduce risk and create grow and protect your wealth. Fellow risk takers, this is your worst podcast hosts Andrew Stotz and from a Stotz Academy and I'm here with featured guests, Damon Pustaka. Damon, are you ready to join the mission?

Damon Pistulka 00:43
I am ready, Andrew.

Andrew Stotz 00:46
Let me introduce you to the audience. Damon earned a mechanical engineering degree in college then worked in technical and managerial roles including designing built building and operating facilities over the over his decades of experience. He has led various businesses and now he helps owners build valuable businesses that they can sell when they want to Taman take a minute and tell us about the unique value that you're bringing to this wonderful world.

Damon Pistulka 01:14
Well, Andrew, I am lucky enough to have a very diverse background, it said like, you know, I thought I was going to be an engineer when I went to school and, and pretty soon I realized that I liked managing people more than doing technical work. And then the next thing you know, I was in a fast growing company. And four or five years later, I was building and then running, manufacturing plants. And then ultimately, not too long after that I started running manufacturing companies for investors started out with a family operated business, but was doing it for investors after that. And then it was multiple businesses doing turnarounds and sometimes doing more than one business turnaround at once leading those businesses. So I got a wealth of experience. And I worked with a lot of very smart people doing it. And now what I get to do is I get to help private business owners turn their businesses back around or tweak them a bit to help them be much more valuable today. And actually sellable tomorrow, so they can realize the hard work they put into it.

Andrew Stotz 02:24
What's the reason why? I mean, most people think that business leaders are successful, they're smart, they build teams, they build businesses, but so many businesses go wrong face problems, all that like, what would you say is kind of the common theme that you see of why people get themselves in trouble?

Damon Pistulka 02:44
Well, we go into business because we know how to do something, right? Could be I know how to build rocket engines, I'm gonna go build a rocket engine company, I know how to build rocket engines, I don't know, I'm not the best at building teams, I'm not the best at building supply chains. I'm not the best at building design teams, I know how to build rocket engines. That is the biggest problem that we see in business is that people that are in business that are visionary enough to start a business are not necessarily the people that understand how to set up a business, it's going to be valuable for the long term.

Andrew Stotz 03:17
You just think of the guy that's got a rocket engine company, Elon Musk, he didn't go into it. Because he was expert at building rockets, he saw an opportunity. And that's, that's interesting. I think that's that shift from how many people can truly make the shift from being like a technician, and an expert in a particular area, to all of a sudden managing a business which requires, you've got to understand marketing, you've got to understand sales, you got to understand customer service, you got to understand human resource, finding good people goal setting, how do you keep people on track, you got to understand regulatory issues, you know, like all of these things. And when you're just starting your business, you're the only one, you know, and so you got to kind of marginally deal with all of these areas. Can most people just get overwhelmed with that?

Damon Pistulka 04:06
Yes, yes. And in you, you laid it out? Well, Andrew, it's, it starts out that you have to do that if you're in a small business, and you start out like that you're gonna wear all those different hats and do those kinds of things. And what most people fail to do is to go okay, what's the next step after this? And how do I scale? Who do I add? What's the next step after that the next step after that, and you'll see businesses naturally will pull that plateau at a size. And it's because they simply, the owner cannot work any harder. And it's not that they want them to write, but, you know, you're putting 60 steadily, many hours and yeah, there's limits, right? There's limits, there's limits, and they don't know how to scale their business so they can continue to leverage others to grow beyond that.

Andrew Stotz 04:50
So i Now when people come to talk to me about starting business, and you know, one of the great things about this podcast is that you know, just so it's a wealth of information you Knowing I've learned so much. So when people come to speak to me about how I got this business idea, the main thing I asked them is, how quickly can you get to $5 million in revenue? And they, they say, Okay, why 5 million? And we talk about and I basically tell them, Look, it's going to take $5 million in revenue, to comfortably hire a professional management team, to comfortably pay for the enterprise resource planning software, you're going to need the sales software that you're going to meet need, the marketing people, the regulatory people, you know, all the outsources that you're going to need for the different things, you've got to get to 5 million, or you're a one man show, or one woman show. And most people say, Well, that wasn't really my plan to get to 5 million, and then you realize, yeah, it's a hobby, it's a one man show. So you got to get so that you can afford the infrastructure, that means you're not doing it on your own, because it's just a dream. And I think for the listeners out there, that are thinking about businesses, or you're stuck in a business now where you're making, you know, five 500,000, or whatever, you've got to get to 5 million. That's what you do. Tell me tell me just briefly, before we get into the big question of the day, you know, you've talked about how you help owners build valuable businesses that they can sell when they want to maybe just give us a little brief on what you're doing, and also where people can find out more about what you're doing in case they need that.

Damon Pistulka 06:32
All right, yeah. So what we're doing is basically, we use the processes I developed on where and the other team members that I've got in our company, when we develop when we're working with investor owned businesses, because investor owned businesses, whether you're public whether you're private, it's the same right? We got value today, we know what value we have to be at tomorrow in a certain timeline. And private business owners typically don't do that in what we do is we say, Hey, your business is worth 2 million today. You need it to be worth 5 million tomorrow, or two years from now, when you exit? How are we going to get from A to B? What is the team look like today? What does the team look like? Then? How are we going to get there and then we begin marching down the road, we same things you have to do. And most larger companies annual budgeting down to weekly performance indicators, making sure the teams are responsible for certain portions of the business and helping them get that laid out and understanding and get the teams really working together to achieve the goals. And sometimes it's bringing in outside resources in the beginning to keep things and get things moving faster. But over time, we have to have the whole team building and working together towards that goal. And we get the teams on the weekly KPI kind of March, the middle level management teams working on that. And then we do monthly progress updates, kind of like advisory board meetings with the ownership to go over. Okay, here's what the financial said, here's what your team said they're doing, here's what they say they're doing moving forward, and we mark them to where we need to go.

Andrew Stotz 08:10
So it sounds like it's goal setting, and team building coordination, communicating back the targets that you're going for, and giving feedback to the management team and the owner as to you know, where are we at? And then it's driving that forward?

Damon Pistulka 08:30
Yeah, it's basically what we do is we bring professional business processes into an entrepreneur led business that to allow it to go to the next level.

Andrew Stotz 08:43
And how long does it take to make an impact? Let's say, you know, you come in for your first month, let's say someone hires you, you know, you're not gonna be able to make a huge impact maybe in the first couple of weeks, the first month, the first three months or six months, but how long does it take before someone says okay, I really starting to feel the impact of this,

Damon Pistulka 09:00
you can feel the impact in 90 days, and then 24 to 36 months, you can quadruple quintuple the value of your business.

Andrew Stotz 09:10
And he uses that opportunity there for most businesses and it's just like it's sitting there they just can't pull it together because of legacy and other issues.

Damon Pistulka 09:18
Unless you're constrained by market. You know, I just can't go any bigger because of my market or there's some specialty kind of equipment thing and manufacturing where that timeline and the expanse for it's gonna kill you it usually there is, you know, in the, in the spaces that we work in health care and construction and manufacturing ecommerce, usually it's, it is very doable.

Andrew Stotz 09:43
Exciting, and where should people go if they want to, let's say listen to it's going I think I need that.

Damon Pistulka 09:49
They can, they can check me out on LinkedIn, Damon Pustaka. I post them there but also they can go to our website, exit your way.com just like it sounds Cool.

Andrew Stotz 10:00
Well, now it's time to show you a worst investment ever. And since no one goes into their worst investment thinking and will be, tell us a bit about the circumstances leading up to it, then tell us your story.

Damon Pistulka 10:11
All right, well, my worst worst investment ever shortly, when we started, our current company is a year away, we had, what would have been considered a dream client. And our worst investment ever was we allowed that client to be far too much of our overall business. And this is common in smaller businesses, especially when we're starting up. And it was a significant client for us. And we got that client through our exit your way process. And we were looking to exit with them with a very nice return on our effort. And after two, two is about 24 months of work. They just decided to stop.

Andrew Stotz 11:00
And what do you mean, stop?

Damon Pistulka 11:02
Like, we were sitting at the table one day with a buyer that was willing to pay them actually a more than $10 million dollars more than what they had initially said they wanted to sell the business for? And they just said no, I think it's worth more than that. And back in and, and it was seven figures is what we were talking about it cost us and that's single conversation in a newer business. So it was quite a blow to us. When we did that. And it was quite the investment in time that we had put into it. We had, we had not built other clients up. I mean, basically, we started our business over, we started our business over again, not only we're not gonna fade, we started our business over and took us almost 12 months to get back after that.

Andrew Stotz 11:59
And just so I understand, I guess you're compensated, not by let's say, having a stake in their company, you were compensated by some portion of the exit proceeds from the sale. Okay, got it. That was the vast majority of how we were going to get paid. Right. So tell me the lessons that you learned.

Damon Pistulka 12:21
First of all, never, never. I had a lot of trust in this person. And we had thought about changing our contracts. Before we did this to say there were some more out clauses, because we are significantly leveraging our time against future value with clients. And we had not done that. Now we do that. And it's very clear. I mean, that client today, yeah, they wouldn't pay us a full amount, but we would still get enough to go okay, it stung, but we're gonna move on. That's the first thing. The second thing is we are much more diligent with our clients about really understanding what it means when you have life changing money in front of you, and turn it down. And the risks that that can mean, me because we're talking about this is a person that was going to be able to set their family up with generational wealth, and walked away from it. And his as Subsequently, I think their business is still generating money, but I don't know, I don't know how well it is. But I'm certain there's probably not as good as it was positioned then. And this is things that we see a lot though in the industry of investment banking, or business sales is that get to the end, and owners get nervous about taking that amount of money. And it's really something that they need to do think long and hard out well before they start. Because if you got that line in the sand, and you get that number that you know that your financial planners and everybody and your tax advisor says, hey, that's enough money to do whatever you want to do next. Take it and go. Because just think how many people in the US in real estate got caught in the real estate downturn in their businesses again for another 10 years? As they went up? And then we hit COVID and did the same darn thing to some of these people? I mean, business is not good forever.

Andrew Stotz 14:29
And I'm just yeah, I'm taking some notes as I'm listening to you. And it brings up a lot of things that I was thinking about. The first thing is concentration risk, whether you're concentrated in a small number of stocks in a portfolio, whether you're concentrated in a certain product, a certain region, a certain customer. Everybody needs to be careful. Now the problem you have when you start business, you're naturally going to have concentration risks that should do that. And so then you really have to work hard. And we had a particular customer in our coffee business that was huge. And we basically said, we have to bring this down not through reducing revenue from them, of course, but increasing revenue. And then we did, eventually, we lost that customer over time. And it wasn't that painful. And so concentration risk is a major one. The second thing is, when you're starting a business, the reality is, and when you're doing business, the reality is, you're gonna, you're going to have losses like this, because you're figuring out your model. And you're going to be testing things and seeing, you know, what works and what doesn't, you know, I had a case in my business, one of my consulting clients, or advising clients, and basically, normally we work with the owners, but for some reason, we got working with the CEO and the operator, and the owner was in a different country, they had contributed a lot of money, and they were all very well, they all got along really well. But in the end, we got kind of stuck with the CEOs, interests, not the owners interest. And then I realized we can't untangle this, and we're gonna be, we're gonna, it's gonna get worse. And the owner is going to feel like we're representing the interests of the CEO, we don't want that we want to represent the interests of the owner. And we, we had to exit and we lost a little bit in that, but we, I just knew we had to get out of this. And so you're gonna have losses in the beginning. That's the second thing that I would take away, that as you work those things out, because you said that you got better at, you know, the way you did it. And then the third thing is, you know, one of the issues that we're always faced in businesses, particularly like some of the opportunities is, do we get compensated in a payment or fee? Do we get compensated in percent of a transaction, or do we get compensated in a percent of shares in a company, and all of them have their pros and cons, if you had been compensated as a share in the company, then you would have been able to continue to get any cash flows that was coming from that company. But there's a lot of other issues about being stuck as a minority shareholder in a private business. So but the point is, is that as as a listener, for the listeners, and the viewers out there, think about these three, now, one of the ways that we do it sometimes is we said, look, if we like the business, and we're working with them, we'll say, you can pay half of your payment, through shares, but we have to be the financial people, you know, running the finances, or else, we're not going to do it, if it's a small business or medium sized business. And then the last thing is, to the owners out there is don't be overconfident, when you get a good deal on the table, you know, take it and I represented a company, and we sold the company, a friend of mines company to Microsoft. And when we flew there to do the final deals, you know, my communication to everybody was, we're going to leave with a deal. And we're going to work to get the highest price that we can get. But there's going to come a point where we're going to start. And then when I met with the Microsoft guys the night before, I basically talked to them and said, Look, your price is way too low. We're here to sell this business. But the price is way too low. And I was of course, just setting an anchor that we then went to negotiate on the next day. So when you get that deal, and it's close, because my client wanted 100 million for their business, and we got it up to 85. And I told my client look, take the 80 fine. And they did. So those are the things that I took away from what you've said, Is there anything else you'd add to that?

Damon Pistulka 18:57
No, I think you've summed up well, Andrew, that's those are great, great lessons for people to take away from this.

Andrew Stotz 19:04
Yeah, it's, it's such a fascinating, you know, way to get paid as a small business as an advisor. There's so many things to think about. So I think you've given the listeners and the audience the ability to kind of to think it through a little bit and know that they should so based upon what you learned from this story, you know, let's go back in time, when you first signed the deal with these guys and got on board with them and all of that. And let's imagine another person who's got a business similar to yours and here they are in you know, let's say in Mumbai, and they're working with a potential client just like yours, same situation. What action would you recommend our listeners take to avoid suffering the same fate?

Damon Pistulka 19:45
Oh, make sure there's an out there's an out clause for you. For them in the end if someone wants to say no, that's fine. But if you're leveraging a majority of your payment on a certain future or event. And you've put your end of that bargain in come to terms with where you were, what that means, if the event never happens, even if you performed.

Andrew Stotz 20:11
Okay? And what would that look like? Now, if you went into that and how it

Damon Pistulka 20:15
for us now it's we figure about what we're going to do. And we say, okay, it's this much percentage of the total we would normally get for the thing and you can walk away at that point. And so that's, it's not an easy decision make, but it's a decision they can make. And everybody feels good walking out of it. You do that before you get in?

Andrew Stotz 20:36
Yep. And what's a resource, you'd recommend a resource of your own or any others feel free?

Damon Pistulka 20:43
I mean, to do this, no, no, just

Andrew Stotz 20:45
just well, for either this or any you'd like to recommend to the audience to learn more about this or what you're doing or anything else.

Damon Pistulka 20:52
You know, we've got a lot of guides and videos on our website, they can look at the exit away.com website and look at a lot of things there. And if they just want to reach out, we can talk about their situation. I certainly I'll just talk to people about

Andrew Stotz 21:06
that and help them. So just go to exit you away.

Damon Pistulka 21:09
Exit your way.com.com

Andrew Stotz 21:12
I liked the name of that, by the way. That's great. All right. Last question. What's your number one goal for the next 12 months?

Damon Pistulka 21:20
Number one goal for the next 12 months is we are undertaking a fairly significant marketing content development project that I think is going to transform the way that we do business, quite honestly. We've spent, we've got it, we're about four months into it and we've had about the, you know, eight more months of it before we have the foundational things completed, but yeah, it's gonna make a make a big difference, sourdough, and that's what we're doing this year.

Andrew Stotz 21:55
Exciting. Well, listen, there you have it another story of laws to keep you winning. Remember, I'm on a mission to help 1 million people reduce risk in their lives. If you've not yet joined that mission, just go to my worst investment ever.com and join my free weekly become a better investor newsletter to reduce risk in your lives. As we conclude, Damon, I want to thank you again for joining our mission and on behalf of a Stotz Academy, I hereby award you alumni status for turning your worst investment ever into your best teaching moment. Do you have any parting words for the audience?

Damon Pistulka 22:32
Thank you for having me under.

Andrew Stotz 22:34
My pleasure, and we enjoyed it. And that's a wrap on another great story to help us create, grow and protect your well fellow risk takers. Let's celebrate that today. We added one more person to our mission to help 1 million people reduce risk in their lives. This is your worst podcast hose Andrew Stotz saying. I'll see you on the upside.