The Growth by Subtraction Playbook for Middle Market Founders with Yarin Gaon

Joshua Wilson: 0:00

Hey, good day everybody. Welcome to The Deal podcast. The mission and purpose of this podcast is to inspire the future generation of deal makers. You're going through college, or maybe you're about to start college, or maybe you're in a career and you're looking to branch out. Build a business, sell a business, grow like you're, you're being itched by that. This show, we bring on people of all walks and stages of business growth and development to come share their story, to share some feedback for you, and they do this. Because they care about the ecosystem and they wanna share their wisdom and knowledge for you. So our ask is this, do me a favor. Reach out to our guests, say thanks for being on the show. All right. Their contact information will be in the show notes. They're investing their time, energy, and effort. Let's be a community of gratitude. Say thanks. Find a way to do a deal with them. Find a way to work with them. And then, heck, if you've liked this show, consider doing this, sharing it with someone who might need that encouragement or that next path of wisdom. Share that with them and, and let them know. Now let's dive into today's show, yarn. Welcome to the podcast.

Yarin Gaon: 1:01

Hi, Joshua. Thanks for having me.

Joshua Wilson: 1:03

Yeah, you got it. All right. Who are you and what do you do?

Yarin Gaon: 1:07

Yeah, well, I'm yarn. I'm a serial entrepreneur, investor. I started several companies. I'm currently in my fourth one. Last one became the largest e-commerce platform for military goods back in Israel, which I exited. I moved to the states, finished my MBA, worked as a entrepreneur in residence in a venture capital firm. And that's a very fancy way to say that. What I basically did is I worked with startups that, um, failed or just got distressed, and my job was to turn them around. So that's what I did. For about three years, I'm a mentor at the University of Chicago. Mentored over about 400 different founders through University of Chicago and score, and I quit, uh, about three years ago to start Factional Partner, which is a growth firm, which we're gonna talk all about today. We talk, we're gonna talk about growth. We're gonna talk about what you get stuck and what you can do about this.

Joshua Wilson: 1:56

Yeah, I too was an EIR at a Were you at AVC group? Yeah, yeah. Yeah. Great experience, but it's like, it's, you know, turnaround King or doo for VC groups. Right. It's, it's a lot of work.

Yarin Gaon: 2:10

It's a lot of work.

Joshua Wilson: 2:11

Great. Grateful for that opportunity. Thank you guys for giving me in that bat and trusting in me. Uh, but yeah, man, it's, it's a, it's a tough gig. Uh, let me ask you a question. I I, I don't know if this would pop into, you know, normal people's brains or just mine. You sold, you know, fourth company, you sold the, you said one of the larger companies. Was it a pretty decent exit over in, uh, in Israel?

Yarin Gaon: 2:33

It was an okay exit. I did that when I wasw, I exited when I was, I think 28. I learned a lot. Yeah. I mostly learned what not to do when I want to exit a company and uh, it gave me a lot of experience as an operator that now I apply as an investor.

Joshua Wilson: 2:55

Yeah. Well, let's go through that, man. I, because I think there's a lot of people who are, you know, coming to us. We do sell side advisory work. Yeah. So they come to us and they go, you know, we wanna sell the company. And, you know, I, what I wanna do is arm them with some wisdom from people who have exited. Yeah. What would you have done differently?

Yarin Gaon: 3:13

Ooh. I have a lot of things I would've have done differently. Let me give you a couple. Okay. So one is around labor. So I built an e-Commerce D two C website. We had a physical store as well, but the challenge was I was cheap and I hired low level employees because I, I wanted to save a buck. I wanted to protect my margins. But the challenge was two, two challenges came out of it. One. I got, I, there was no one to help me with decision making really. They were tactical employees. So you hire, you basically get what you pay for. And they weren't able to help me move forward because they are, their job was to help me tactically, like ship and pack and they would customers not to think. So I hired people that were. Usually, like today, I would've hired people that are smarter than me, but I was cheap, so I hired low level employees. That mistake number one. Which led to when I wanted to exit it, I didn't have a strong team in place, so it was really around me. I was trapped in this like the E-Myth, um, situation where I was the owner operator and without me it's not as strong.

Joshua Wilson: 4:26

Yeah.

Yarin Gaon: 4:26

And mistake number two is I overbuilt systems. So I am a, I used to be a developer. I built the e-commerce platform. I built the ERPI built the POSI built the system that the business ran on, which I loved.'cause it's really fun and you get to build systems and you get to automate your work and. Money flows in and you can see the impact. But the challenge was when I came to sell it, those systems became a debt, not an asset.'cause I was the only one that built it. I was the only one that knew how to maintain it. All of a sudden, when I wanted to exit, this became a liability that needed to be replaced, not an asset that weren't a multiple. So it hurt me in the long term.

Joshua Wilson: 5:13

Wow.

Yarin Gaon: 5:15

Couple

Joshua Wilson: 5:15

of us. Okay. Yeah, that is, I think that is such a powerful thing, especially with the world of AI right now, where anybody could dive in and build an app. I ran, I, I'm a victim of this, like, not a victim, not a victim, but like I, I, I was guilty of this, where I'm building some systems and I'm like, oh, I'll just build a CRM and I'll build a workflow and I'll build all this stuff. And, you know, I look up and it's like two weeks later, I built some really cool systems, but I'm the only one in the world who knows how to operate these systems, and they're pretty good. But for $300 a month, I could have a kick ass system that's built, tested by thousands of people. And that's where I was like, man, Josh, I'd love your advice on this yarn, especially for the people in the community. There's a point where we have to stop building and sell more, serve more stop almost like stop working in the business and go do business.

Yarin Gaon: 6:10

Yes, we'll talk about this in a moment, but I, we'll talk about that framework, but I wanna suggest a different approach of looking at it.

Joshua Wilson: 6:16

Okay, go for

Yarin Gaon: 6:17

it. So the approach is identify your core competencies and only double down on those. So I'll explain what I mean that, because it's an MBA term core competency, you can think of it as like. Strategic advantage, core competency. So if look at, if you look at a business, what's a business? It's like a bunch of people and numbers, but there are only a handful of things that a business knows how to do extremely well. Well, if you look at a business and you kind of dissect, okay, what, what are you doing? You're doing sales, you're doing marketing, but what, where is the value being really being generated and where is the differentiation? You can identify two or three areas where you do something extremely well compared to your peers or your other competitors, if you are able to articulate those.

Joshua Wilson: 7:02

Mm-hmm.

Yarin Gaon: 7:02

You will double down on those. So if I was doing that exercise when I had my company, I would've said, okay, my domain expertise is in, I don't know, collecting and finding unique products on the website. It's not in building systems. I'm not a software company. So when I face a decision, should I build or should I buy? The question should have been, is it a part of my core competency? And if it's not, it's just a distraction. Si. Similar thing, different prism.

Joshua Wilson: 7:32

Yeah. Double down. Double down. Correct. What? What could have happened if you took that methodology and doubled down on your core competency? Your ability to source deals, structured deals, put that together, and then hired well people, smarter than you, people giving you the ability to think. Essentially what you're building with fractional partners. Like what, what would you have done? What could have been, what would've, what would change the outcome you think?

Yarin Gaon: 7:59

Well, well, two things would've, would've happened. A, I got, I would've gotten a higher multiple and a higher, um, exit valuation. And second, my business would still be alive today. So the brand that I've built was run down to the ground. So I ended up selling to my largest competitor and because, uh, it had a lot of. Unique systems in place. They had a very hard time maintaining it, and the brand doesn't exist anymore. They, they rent it to the ground. So I didn't build an asset that o over that, that lasts longer than me. Yeah. Which is, that's the failure point. Um, that would've, would've changed. I would've gotten more money and the asset that I have built would've still be alive today.

Joshua Wilson: 8:40

Yeah.

Yarin Gaon: 8:41

Without me.

Joshua Wilson: 8:43

So sold in Israel, came over to the us. Then went, you know, you, you started working with the, uh, VC group. You were doing the EIR, you were kind of a turnaround guy for, you know, unwanted portfolio companies or, or doing stuff. Right.

Yarin Gaon: 8:58

Unwanted, very wanted.'cause they spent a lot of money in being, in, being there, but yes.

Joshua Wilson: 9:03

Yeah.

Yarin Gaon: 9:04

Distressed,

Joshua Wilson: 9:05

stressed. That's a nice way to say it.

Yarin Gaon: 9:07

It's the term.

Joshua Wilson: 9:07

And then here we go. You went to go get your MBA. Now let's compare apples to maybe oranges Sure. MBA versus the, the experiences that you had. Buy, build, sell your companies working in a VC group, do you see that there was any value in going MBA and if so, what?

Yarin Gaon: 9:25

Ooh, ah, so just timeline. I finished my MBA then went to, uh, B-N-E-I-R. Okay. There is a ton of value in um, MBA, but here's what I'm trying to, here's the gap that I found. MBA is great. But it really preps you for a Fortune 500 position, especially in the larger schools. But I'm a builder, so I am really interesting in playing in a usually zero to 10, maybe two to $20 million top line. So these are lower middle market, and what I found is there's a gap between the methodologies that they teach you in MBA and how people actually practice those in real time as an owner operator. So we can talk all day long about, oh, you should double down your core competencies. How many people really know how to identify core competencies, right? These are like terms that because they're so high up, they become inaccessible to owner operators that are actually needs to need to apply them in real time. Yeah. Does that make sense? Oh,

Joshua Wilson: 10:23

for sure. Keep going.

Yarin Gaon: 10:25

Like the concept of, okay, let's identify your most profitable revenue streams and let's double down on a, on your, um, most profitable revenue stream. Okay, that's great bud. How do I find what's my most profitable revenue stream? I can find what my most, uh, the most gen like revenue generating revenue stream is. That's no problem.'cause you can look in sales, but how do I look at it in the prism of ebitda and how do I take all these concept that, okay, yeah, I wanna increase my ebitda. That's great 'cause it's PE term, but like how. So what I ended up doing, and we'll talk about this in a moment, is trying to build a framework and a method to take those MBA complex terms and that almost like translate them into normal people, normal speech.

Joshua Wilson: 11:09

Yeah.

Yarin Gaon: 11:10

That can actually influence decisions on the lower middle market.

Joshua Wilson: 11:14

Yeah. Yeah. I think I, I went and, you know. It. It doesn't matter. The, sometimes I feel like when someone who's teaching you something out of a textbook or even a book, by the time it hits the market, sometimes it's outdated. Ai. If I were to write a book on ai. I feel like by the time it's published and go through that process and I go on my book tour, it's already outdated. Right. So I think it, I think you're right. The MBA, and this is just my personal opinion. I don't have an MBA. You've got one. That's awesome. I can't, this is my opinion 'cause I have an option to go for it.

Yarin Gaon: 11:51

Yeah.

Joshua Wilson: 11:51

But I think it's great for. Larger businesses, larger, maybe even larger funds, where at the, at the stage of business where they're focused, they're past scale and they are focused on systems, processes, shareholder value, maximize, you know, public, you know, the public growth side of things. That's perfect. MBA stuff for people in the startup land or deal making, land service provider land on the front end of that. I don't know. Um. You, you experienced it, so you, you might have an opinion on it, but maybe that's just a political rant for me or a a, a rant on what's going on in the world. But let's dive into, there might be someone out here who agrees with me or wants to wrestle with me on it. Let's do it. But let, let's dive into fractional partners.

Yarin Gaon: 12:36

Yeah.

Joshua Wilson: 12:36

You, uh, you decided to quit EIR. Then what happened and why did you quit?

Yarin Gaon: 12:46

I quit because of several things. I quit because I wanted to deploy my own capital.

Joshua Wilson: 12:52

Mm-hmm.

Yarin Gaon: 12:53

In companies, I quit because I was done working with distress companies, um, especially startup distress companies. A lot of them, the major. Challenge or thread was missing product market fit. So what that means really, that they haven't really found the secret sauce to begin with. So the work wasn't to systemize or clean the work was to reinvent the business. And it's very hard to do and very, it's very hard to do with someone that it's, it's not my business. It's not really my business, right? I come from the fund and I'm here to help, but it's not my business. But what I've learned is there's a very unique. Way of how you can actually help companies and deploy capital. And explain what I mean by that. So when I came to work with portfolio companies or startups from the fund, I came as this really weird person because I was sent from the fund. To join a portfolio company, but I wasn't exactly inside of the company, but I wasn't exactly outside of the company. I was this weird internal external resource, right? Because I had resource that I brought with me, but I wasn't exactly a part of their C-suite. So it's a really weird interaction. And I actually feel like it's a really unique interaction because what I ended up doing is I ended up building a model that is called Fractional Partner, which is, this is really where I feel a lot of companies at a specific stage. That's what they really need. And I explain what I mean by that and. Some companies as they grow and they are what we call in the messy middle, I call it a two to $20 million in sale. It's like found product market fit, but not have, have not scaled yet. And what they need is not someone to just write them a check. I didn't wanna, okay, so I wanted to invest in companies and the more I saw, the more I got scared because I saw how a company gets distressed and I saw like repeating like patterns that keep happening and. Instead of just writing them a check, I wanted to help them. So I found this really unique model that is called Factional Partners. The idea here is that you don't just need someone to give you a check. You need someone to act as your. Fractional partner, right? You almost you're co-founder for a very specific period of time and help you work on the business, not in it. Like, you don't need me to be in your C-Suite every week and lead your leadership team meetings. That's your job. But you do need, or a lot of them need a. Help with making decisions on the day decisions that if I was just a board member, it's just not enough. So I ended up building a different model of how to invest in companies and how to help them in a different way. That is less than if I was a part of their team, but more than if I was their board member. That's what I feel like they need at that messy middle stage. Does that make sense?

Joshua Wilson: 15:51

Yeah, absolutely. Um, all right, so let, let's, let's dig into this messy middle a little bit.

Yarin Gaon: 15:57

Yeah.

Joshua Wilson: 15:57

All right. So we've got, we've got EOS Yes. We have, we have a lot of business frameworks that are being created.

Yarin Gaon: 16:04

Yes.

Joshua Wilson: 16:04

Uh, around that. And I even saw on your website, you, you mentioned EOS and you have us Yes. I've seen that do great for companies. Yes. Where is it failing that you think fractional partners could fix in.

Yarin Gaon: 16:15

Yeah, EOS is a fantastic framework. I deployed in all of my portfolio companies and all the companies that I work with. Here's the crooks with EO. S. EOS makes sure everybody's roaring in the same direction. It assumes the direction is set, and what I found is a lot of time in this messy middle of two to $20 million in sales, the direction isn't set. So EOS is an executional system, right? It's an entrepreneurial operating system. It's operating, it's about operations. So it's great making sure that everybody's running the same direction and stuff that needs to get done gets done, but it's very light on. Where you're going. And what I found is that the two to$20 million in sales, their biggest challenge is that they haven't really decided what is worth scaling. So they just ended up systemizing a very wide inefficient business instead of hyper-focusing, doubling down and then bringing EOS to. Systemize what exists? So let me, let me give you like my, my spiel around like what I see in the world. So there are different growth. Phases in different growth methods for each stage. I'll explain what I mean by that. As a company grow, zero to one, zero to two, it's all about growth. By addition, I wanna say yes. More customers, more revenue stream, more channels. Let's see what works. Yes, yes, yes, yes. What what happens is, as they find product market fit, and by product market fit, I mean like something is working, there's, there's clear demand in the market and something is clicking. Most companies. Never make a transition from growth by addition into growth by subtraction, and growth by subtraction basically says, okay, I found what works. I'm gonna identify the 20% of my business. It is actually worth scaling, and I'm only gonna scale that thing. They don't do it. They revert or default to what they know, which is growth by addition, and they basically try to scale everything, right? I got, I, I, I'm gonna get more channels, more territories, more geographies, more revenue stream, more ICPs. What happens is, because they're still small, small teams, not a lot of capital. They get stuck. Mm-hmm. And where companies get stuck, they feel the friction of, I'm trying to do too much. This has become unmanageable. And the first inclination is to go and implement EOS.'cause they feel like, okay, I feel like all these friction, we're doing too much. Let's bring an executional system to help us kind of streamline the business. But my, my thing is, and my, my preaching is these frictions are not tactical. They are strategic decisions they will never make. And I'll give you an example. Let's say that they are seeing that their marketing is not performing anymore, or the CAC is going up. So the first inclination is, okay, let's put systems in place. Let's hire more people. Let's start a new campaign. Versus maybe I'm serving too many type of customers because I'm serving too many type of customers. My message is diluted. And it's not hitting. So it's, it's, it's a planning layer that most people like skip and focus on execution.'cause that thing, that's the problem. But my whole thing is at a two to 20, it's rarely the problem. Pause.'cause this is a lot.

Joshua Wilson: 19:36

Yeah. Let's wrestle here. I thought you were gonna go down this route and this is what I've heard a thousand times.

Yarin Gaon: 19:42

Tell me,

Joshua Wilson: 19:43

all right guys, everybody's doing growth by addition. Yes. More customers, more this, and then. People jump to growth by multiplication. So they start jumping into at mergers, acquisitions, and they're like, okay, here's where we're at. If we want to grow and scale, we need to multiply. So let's go buy businesses and pull them into the mix. So what I'm hearing is, is if there's a problem. Your core platform and you do growth by multiplication, your problems might multiply. Correct. Your non-producing systems and processes may multiply. Also, you have this methodology where, first let's do growth by subtraction.

Yarin Gaon: 20:25

Correct.

Joshua Wilson: 20:25

Double down on that. Then we can do growth by addition maybe again or multiplication.

Yarin Gaon: 20:31

Yes. But is yes. Conceptually. Let's think about this for a moment. You built a business.

Joshua Wilson: 20:38

Mm-hmm.

Yarin Gaon: 20:39

Of everything you built. If you actually look at the business, there's a core that generates most of the profit. Not the revenue, but the profit.

Joshua Wilson: 20:47

Profit. Yeah, yeah, yeah.

Yarin Gaon: 20:47

Why won't you wanna like pause for a moment, redirect the entire business to that, focus on that core, and then scale that super tight optimized business model. Then you go scale it either by additional, by multiplication. But what people do is they miss the optimization process and they try to scale it too early when they really haven't decided what is worth scaling.'cause you built many things. You're probably serving at five, $10 million. You're probably serving multiple different type of customers. You probably have your product in multiple different channels. You probably have multiple products. But if you look at it from an EBITDA perspective, right? The goal here is to maximize exit value. I wanna find the levers that actually move EBITDA and almost like get rid of everything else. Find that core tight-knit core, and then scale that, that's a just much more profitable way of going about this.

Joshua Wilson: 21:44

Okay, so you asked the question, why don't you,

Yarin Gaon: 21:47

ah,

Joshua Wilson: 21:47

go this rate. Okay. Why don't messy middle, middle market, lower middle market companies do this. If, if this is correct, why don't they do this

Yarin Gaon: 21:56

for two reasons. One is because they default into, uh, streamlining tactics. So the first inclination is to streamline, streamline with SOP streamlined, with installing EOS, streamline what exists. Instead of taking a pause and kind of figure out what is the version two of my business that I wanna, um, create. And the second reason why they don't do it is because. There isn't a process of how to do this. So if you are, so let, let's talk about private equity for a moment. If you sell to a private equity firm, that's exactly what they're gonna do to your business, right? They're gonna deploy their private equity playbook and they're gonna figure out, okay, where's the profit center in this business? What else can I outsource or like, remove from this company? And I'm gonna scale that very specific. Area. What I'm trying to do is I'm trying to say, okay, here's that private equity MBA playbook that exists. If you sold your business and you are out of it here, use it. Use it before you sell, take it. Here's the process that I've built of how to take a company and buy yourself even without me. Go through the process of identifying where the core is, identifying exactly what you wanna double down on, narrow the business, and then scale. It was just, they're missing this, like an eeo S is a process of streamline op, like streamline optimization of the, uh, tactics or the operation. I have built a process to streamline the business model that happened just before you streamlined the operation. And it's Oakland.

Joshua Wilson: 23:34

Huh?

Yarin Gaon: 23:36

It's a lot. I know.

Joshua Wilson: 23:37

Yeah. I think this is great. I'm writing good, uh, good notes here. Now, uh, Volti, uh, Pareto right? He's the one who says 80% of the results comes from 20%, right?

Yarin Gaon: 23:48

Correct. 2080.

Joshua Wilson: 23:49

2080, yeah. Is this kind of the lens you're looking through when you're, you're looking at the core business models? A

Yarin Gaon: 23:57

hundred percent.

Joshua Wilson: 23:58

Okay. So then, if this is true, he was an economist. Italy. I think if this is true, then, then what you're saying is people get so busy into building, they start focuses on SOPs and streamlining tactics and hiring more people to make things more smooth rather than going, what roads do we before we smooth some roads? What roads do we actually travel?

Yarin Gaon: 24:25

A hundred percent.

Joshua Wilson: 24:26

Okay, so now let's just say we've identified, yes, I guess a question is. There's probably a lot of fear in looking at, I need to remove something because every dollar counts in one of these lower middle market companies. Every dollar counts and we're bringing in this revenue, and why are we doing this? Because we've always done it this way, right? But the idea of removing something from when every dollar matters. It's probably terrifying. Yes. What say you, sir?

Yarin Gaon: 24:57

I say not every dollar is created equal. So let's talk about this for a moment.

Joshua Wilson: 25:02

Okay?

Yarin Gaon: 25:02

Profit. Is the average of all of your activities in your company. Some activities produce a lot of profit, some activities produce very little profit or actually take away from profit. So the key is shift your mindset from looking at your top line, which is a vanity metric, into looking at the bottom line, the EBITDA or the net profit, and then you start asking yourself, okay, I am doing five things. Great, and they all produce revenue, but that's very shallow way of looking at this. Let's go one step deeper on an EBITDA lens or on a profit lens, which one of them actually produces the most profit. And once you are armed with the information and that clarity around what exactly is moving your ebitda, then relinquishing or letting go of unprofitable revenue stream becomes much easier. Even if you get a dip in your revenue, you usually get in surplus in your, in your net profit. It's just that you're changing the, the mixture of your revenue stream, right? You are, you are doubling down on the more profitable one, on the expense of the least profitable one. Even though they might bring a lot of revenue or in cash in the door, that is not necessarily a good cash. We want to look it from the lens of like what's left from that revenue stream.

Joshua Wilson: 26:25

Yeah. Here's where I think the um. Here's, here's a sticking point, please. And this is a painful sticking point for a lot of these service-based companies. A lot of these low, you know, lower middle market companies, they don't know their ebitda, they don't know their metrics, they don't know their financials. I'm not passing judgment. It's just the reality of it is they might be spitting off a lot of, uh, revenue. At the end of the day, they go, where did all of our money go? We have a bookkeeper, we have a, you know, someone who does our books or you know, we have an accountant, where's all of our money going? So how do we, so you're saying yes, you gotta focus on the EBIT O. Yes. How do we do levers? They're going great.

Yarin Gaon: 27:12

Yes.

Joshua Wilson: 27:12

How?

Yarin Gaon: 27:14

I'll show you. I built a calculator and it's free and publicly open. So just, just, just context. The whole thing that I'm talking about, the system that I built is publicly open for people to use and opt in, no charge. So you take. Let's, let's talk about two things you said. One is I'm using a bookkeeper or an accountant, and people think that that's what's gonna help them make decisions. So bookkeepers don't make decisions. Bookkeeper's goals and object objective is to make sure your books are clean and expenses are in direct category. That's what their job is. The accountant's job is to make sure your pay, your taxes correct. And larger companies, you have a CFO that helps you analyze. But in the lower middle market, a lot of times they can't afford one. So let's start with like as a business owner operator, it's your job to identify where EBITDA is coming from and what's more profitable. It's no one else's. It needs to be a part of your skillset and core competency. So that's like, one second, you use a calculator, I built a calculator and you use it. But the concept is this. How do I identify what part of my business is more profitable, less profitable? How do I even go through the process and high level, this is the trick. You take your p and l, right? And then you take your revenue stream. You identify areas of your business that are worth clustering or segmenting. Maybe it's the different type of customers you're serving. Maybe it's the different channels you are operating in. Maybe it's the different products you have, you find. Anywhere between two and five different cluster that allow you to start making decisions. And then what you do is you take your p and l and everybody knows that, okay, I have a variable cost for each different, um, channel or I or ICP or, or user. And then variable cost is easy, but where most people fail and where most of money is actually being burnt is on the overhead. And the trick is this, you take your, let's say I have. Three diff, three different channels in my business. I have a B2B side, like a wholesale side. I have a retail side, and I have a direct to consumer side. It. Okay. You take your private uh, uh, profit and loss statement, and then you start attributing overhead expenses to different revenue streams. So you say this, okay. I have a team, a sales team. That sales team only is only relevant for the wholesale because the D two C doesn't have a sales team.'cause it's okay. All of their cost is associated to that revenue stream. I have insurance. Insurance only happens for a physical space. Right, so my wholesale team is not relevant and my D two C is not relevant. It's only relevant from my retail. I'll take that expense and attribute it to that revenue stream. And if you take all your expenses, you gonna, they put them in the right category. What you end up with is a clear understanding of, whoa. This revenue stream, even though we might bring a lot of cash in the door, it's actually the least profitable one if you actually attribute all the overhead that hides.

Joshua Wilson: 30:05

Mm-hmm.

Yarin Gaon: 30:06

So that's the pro, that's the tnic tactical process of getting there. But you wanna, what you are trying to get at is like, where is profit flowing today? Not revenue, but profit. What is my highest margin? Revenue stream, but not gross margin, which is just, uh, your costs, your direct, um. Direct cost, but when taking into account all of the other costs, which one is the most profitable? Which one do I wanna double on? Then you can start making some decisions and you don't feel bad about cutting areas that are quote unquote profitable or have a lot of sales.

Joshua Wilson: 30:43

Man, it absolutely makes sense. Here's what happens. Tell me someone's listening into this and they go, oh man. So true. Alright, so they, what they do is they sit down and they start looking at their books. They start looking at that, and they start digging into the weeds. Which is not their core competency. They take their eyes off of building the business and doing that, and they're trying to figure this stuff out. And then they start studying, and then they're ask and chat. You know, what about this? And before you know it, they've wasted two weeks of their life and they still don't have clear attribution of their expenses to the right categories, the right revenue pass. So then they wind up in the same spot. Am am I right? Like, does this happen?

Yarin Gaon: 31:24

No, not in my experience. So let me just let, let's take the two different path. You're saying, you say, I spent two weeks analyzing my books and I still don't have, well let, let's take the two weeks.

Joshua Wilson: 31:34

Okay.

Yarin Gaon: 31:36

In my opinion, and this is why a lot of companies don't do it, because it requires them to pause, right? There's this element of, I have to pause and kind of take my eye off the operational ball and kind of zoom out and kind of look at my business from a different lens. Think of this, you can walk in a path for two weeks, or you can evaluate your path for two weeks and then maybe come to the point where you're walking in the wrong path. So even though you might pause, it doesn't take two weeks to do the, this is like a five hour activity if, if you are all in, it's a weekend activity. And, but my, my whole thing is. As business owners operating, the mentality is the hustle. I wanna run, I wanna go, go, go, go, go, go. I wanna build more. That's who you are. That's who we are. But without the conviction that you're building the right stuff and you're investing your energy in the right direction, you might spend a lot of effort in doing something that maybe would've been eliminated completely if you spend time looking at your business from a different level. Because you might say, okay, I have this big customer, it's a wholesale customer and I'm spending all this time. But if you went through the exercise, you maybe found out that the wholesale customer is costing you money.

Joshua Wilson: 32:51

Mm-hmm.

Yarin Gaon: 32:51

If you don't go through the exercise, you are just stuck in the, just the hamster wheel of doing more and doing more. Sometimes feel like progress. It's not, it's a trap unless you are a hundred percent confident, it's not a hundred percent mostly confident in the path that you've chosen. That makes sense

Joshua Wilson: 33:10

for sure. Absolutely. Yeah. I've had customers that cost me money.

Yarin Gaon: 33:14

Yes.

Joshua Wilson: 33:14

Right. You know, I sell the deal and then I go serving them and you know, they might take the most of my time. They might eat up all the resources, whatever the case may be. I might have priced it wrong. They just might need extra support. And then what I find is it, it, I only have a set amount of hours in Josh. Yes. Even though I work like a, like an animal.

Yarin Gaon: 33:37

Yeah.

Joshua Wilson: 33:37

At some point. That's the failed system and that's the business owner's dilemma.

Yarin Gaon: 33:43

But if you haven't paused Josh to identify that this is an unprofitable customer, you might fall for the trap of getting the same one again.

Joshua Wilson: 33:50

Yeah. Signing them up or duplicating them. Multiplying them.

Yarin Gaon: 33:54

Correct. But you need to be like an systemic pause somewhere that allows us from being working in the business into working on the business that gives you the insight that. This customer might not be profitable for me. And if you don't pause and you just like run, run, run, you build a business, but it might not be as profitable as you could, as it could be. That's the whole thing here, identify what's happening and then figure out what we wanna double down on and being intentional about this instead of opportunistic.

Joshua Wilson: 34:23

Mm-hmm. Yeah. No, I, look, this makes, this makes sense. Having a entrepreneur. A business owner, slow down is probably one of the biggest challenges that we face. Yes. Because we feel that if we take our hands or our foot off the gas pedal for one minute, everything's gonna fall apart. And if that's the case, it just shows us that we don't have a business, we have a job.

Yarin Gaon: 34:50

Correct.

Joshua Wilson: 34:50

Right. So I get that, and I think a lot of business owners come into that realization when we start looking at, you know, the, the valuation of their business. Right. If it's owner dependent, that's like the number one killer of value.

Yarin Gaon: 35:04

Yes. So let's talk

Joshua Wilson: 35:05

dependent.

Yarin Gaon: 35:05

Let talk about, let's talk about owner dependent for a moment and the shift that needs to happen. If you wanna, the shift that I have not made in my previous business, and I, it's, I suffered when I exited. It's the shift from an operator into an owner. So an an operator, their job is to like, it's manage, right? You're managing your business, you're working in the business. But Joshua, before I tell you, what do you think the most important job for an owner in this bus in a business?

Joshua Wilson: 35:32

It, I think it depends the stage of business.

Yarin Gaon: 35:34

Okay.

Joshua Wilson: 35:35

Okay. Uh, for a lower middle market company, it's probably, um, leadership. So hiring and, and hiring managers. Training managers, right. Like your job is to d duplicate yourself. And then, uh, probably high level. Like financial, uh, growth. That would be my two thoughts.

Yarin Gaon: 35:58

Okay. So we're not far, so in my opinion, we're talking about companies that lower market, so have found some product market fit, but still not fully baked. Yeah.

Joshua Wilson: 36:06

Yep.

Yarin Gaon: 36:07

An owner job is resource allocation.

Joshua Wilson: 36:10

Okay.

Yarin Gaon: 36:11

Your job as an owner is to decide where time, energy, and capital goes. That is your job. Not to manage the day-to-day execution, but to decide where are we investing time, resources, and, and, and energy. And if you, the better you become at allocating resources, the more profitable you will become, the faster you will grow. That is the trick, right? Business is, is a game of the mind. So. So you say like two weeks. My business, like I'm not in my business. I say, that's not your job. Really. Your job is to decide where should we focus on as a team, as a company, where do I want to deploy capital? What areas do I wanna develop and in order to make these smart decision, they there, there must be some. Element of reflection or pause, that is your job. Think of like, I have a $10 million business. I am not dealing with customers on a day, day basis anymore. My job is to decide what customers we wanna pursue, what revenue stream we wanna pursue, what channels we want to. That is it's, I take all of the resources, I have the team, the money, the, the relationships, and ask, okay, so where do we wanna. Use them to get the most growth and the most profit slide shift.

Joshua Wilson: 37:45

Yeah, I like that.

Yarin Gaon: 37:46

So the quality of decisions equals EBITDA Push, please.

Joshua Wilson: 37:59

I see. Well, no, no. I like, I like this. But, um, as we're running outta time, what I wanna do is make sure that our audience knows. What you can help with. Sure. Right, because you built a playbook. Yeah. That people can, you know, talk to us about that. So let's just say this has resonated with people and they're like, oh my gosh. Like, that's, that's where I need to go.'cause I'm not there. Yeah. I'm not an allocator of resources. I'm a doer, I'm an operator. I, I'm a, you know. Right. They're working. They're grinding.

Yarin Gaon: 38:30

Yes.

Joshua Wilson: 38:30

You have a playbook that you've created. Tell us about that. And where could we find it?

Yarin Gaon: 38:34

Sure. So I built, basically I took a private equity playbook and I brought it into a lower middle market and I opened it so you can go. It's called, um, the Clarity Playbook. It's at playbook dot fractional partners. It's open, it's DIY and you can use it today if you are one of these founders that that can just pause for yourself. Go take that. It's a sequential process of how do I find where the EBITDA lies, and then what decisions do I need to make with my team and make sure that I, I, it helps me to double down on the most profitable areas of my business so I can grow faster and be less fiction. What I do is I help companies pause. That is the hardest part 'cause it's very hard for a founder to champion in a process like this internally. So what I do is I help them pause. And then we have, we basically go through the process of deciding what is worth scaling. So you, if you are in the two to$20 million top line range and you feel like you found some sort of product market fit, but growth. Is kind of messy. There's fiction. Instead of just running and try to systemize and going through like SOPs and EOS, I invite you to go through a process with me. We can do it usually in an offsite or we can do it over a quarter. It depends where we, I, I, I, I quote unquote, force you and your team to pause and I give you the space and walk you through a process of, okay. I built a business. That's my V one. Great. What, what does V two look like? V two is the most profitable version of your business that is actually worth scaling and help you cut with confidence so you have a much more tighter. Much more profitable business. Then you go and you scale it without, you don't need me to scale it 'cause you are an excellent operator. There's capital resource allocation. These decisions I help them make as their fractional partner, quote unquote, not as their board member, not as their advisor. But if I was a part of their business and I had equity in your business, this is what I would do to make it more profitable today. But you don't have to take my word 'cause it's your business. So it's almost like instead of buying you out as a private equity and forcing you to make those decisions, I work with companies and the team, the almost like to have them spearhead their own decisions if they make sense.

Joshua Wilson: 40:50

Yeah. Yeah. Yara, this is, man, this is so fun. This is, um, I like it's a lot wrestling with you. Yeah. It's, it's a lot. But I think, I think people could do this and I think that you made one of the errors that you made in your business is that. A, you try to do everything yourself, right? I'll just build it myself. I'll build systems, processes with ai. It's a great temptation.

Yarin Gaon: 41:12

Yes.

Joshua Wilson: 41:13

Or I hire people that, that are doers, which is great, but they need management. They need direction or hiring people that are, um, smarter than you and that you're, that can help you make decisions. That's where I see, you know, this is a, a great, um, a great avenue for, for someone where they can work with you. Get the playbook, but also that you can help them show where to make these decisions. And I think that's super helpful. I think we all need coaches in our life. I think we all need someone who could take a outside perspective on our business and show us the direction forward. So what I'm gonna do yarn is I'm gonna put your contact information in the show notes below. Uh, someone's listening in, they could go download your, uh, playbook or get a free strategy call. I'm seeing that on your website. Yeah. Um, any final thoughts before we say goodbye?

Yarin Gaon: 42:07

As you grow your decision, your, your role as an operator is to make better decisions. And I, it's so hard for founders to pause'cause there's this hustle mentality that is baked in to people that bring, build businesses from the ground up. The people that invest in business that are private equity, they usually don't have, so pause. With me, without me with a different framework, it doesn't really matter. The idea here is don't just go. Don't just grow by inertia. Right? Pause for a moment. Identify what is actually worth scaling. And only double down on those, you'll have a much easier path to scale. You will make more money. Your team will be happier. It's much easier to manage a smaller, tighter business that is more profitable than just a very wide business that does a lot of things that is mediocre in all of them. Pause.

Joshua Wilson: 43:06

Pause, man. As, as we say goodbye. What I wanna do is, uh, resonate on, on one of the things you mentioned, just kind of like to increase that message. Sometimes it's not about ebitda. We, we, we build a business to keep the lights on. We build these revenue channels. We, we build something, and at the end of the day, we look at our business and we, there's certain parts of the business that we don't even like.

Yarin Gaon: 43:27

Yeah.

Joshua Wilson: 43:27

And maybe it's just not even an EBITDA decision, but maybe we need to pause and go, like, as you know, a part of our impact, a part of our heart. Yes. A part of our, uh, joy. Which direction do we wanna go? Because sometimes we get off path. The only way to go back is take a pause and reflect.

Yarin Gaon: 43:44

Yes,

Joshua Wilson: 43:45

super grateful that you, you shared that with our community fellow deal makers. Reach out to our guests, say thanks. Uh, if you have a deal that you'd like to talk about here on the show, or if you'd like to sell your business lower middle market business, head on over to the deal podcast.com. Fill out a quick form and we'll get the conversation started Till then, we'll talk to you all on the next episode. Cheers guys.