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Amanda: Welcome back to the Madison advisory AI podcast. This show is about how leaders make decisions when the stakes are real, the information is imperfect and the right answer isn't obvious. Today's conversation sits at the intersection of value creation, trust and technology, particularly for founder led businesses navigating growth long before a transaction is ever on the table. I'm joined by Sterling Morris, whose career spans investment banking, corporate development, and now advising founders directly rather than focusing on tools or hype, I'm excited to dig into what actually drives value and how AI changes the context for decision making without replacing the human judgment behind it. Sterling, thanks for joining us here.
Sterling Morris: Thank you, Amanda. It's a pleasure to be here.
Amanda: To kick us off, you've had the front seat and seen many businesses up close. Where do founders unknowingly leave value on the table before a transaction or a banker shows up?
Sterling Morris: Yeah, no, I mean, that's a great question. Honestly, it's really been a huge impetus for myself to get into the work. A lot of times when I went through an ⁓ &A process with our clients at the end, a lot of them would say how excited they were to work with investment bankers to understand really how rigorous the process is and quite frankly, get to the end of that process and say, They learned more about their business in the course of a six month preparation, M and a process or an eight month or 12 year, whatever period that was. Um, then they'd learn over the course of running the business and what they said next was really what hit me. And they would say, you know, if they had learned or knew what they knew was required in the M and a process, they would quite frankly, have run their business a little bit differently. So with that, a couple of things kind of come forward. think that partially a lot of times founders feel as though. the process for driving value in a business and the ⁓ &A process and what investors are looking for that starts really when you start talking to an investment banker. And unfortunately, that typically starts like three, four, five years out. A lot of times we see one of the most critical points in the ⁓ &A process is the financials. ⁓ typically look at that three years ⁓ out and ⁓ That is, that's critical in telling the story. And a lot of founders don't realize that and approach the process well within that period, which makes it difficult to, to change the narratives. think first and foremost, it's telling the story around the financials. would say secondarily, a lot of times the, understanding of customer concentration, ⁓ well, a lot of times founders get focused on driving revenue, right? Pointing. to upward mobility in the revenue profile. If you land one client, land another client, but essentially getting to a point where they still have customer concentration amongst one, two, three or four large clients, then that's really not an ideal position for someone who's going to take over an investment in the event that that client doesn't stay there, right? So a lot of times we see them go left or go wrong in this understanding of what's required in an ⁓ &A process. where they don't think about these things in advance. The process for ⁓ &A is really about the transferring of the business to a new owner, ⁓ which quite frankly takes quite a bit of time in terms of preparation that a lot of business owners just don't take into consideration. So that's what really excites me now is to be able to be in the seat that I am to help bring forward some of these items to try and turn the ship and get some additional value for these clients where we can.
Amanda: Yeah, it's an interesting lens because when you're going through an ⁓ &A transaction, it's a different look than if you're running the business operations day to day and you think about value in a different way. And it's interesting that you're able to bring that to light now, much before an ⁓ &A transaction can transpire. ⁓
Sterling Morris: Absolutely.
Amanda: When you've worked on transactions in the past, do you think it's usually one big miss that founders are missing out on, or is it a compounding of a small little mishits?
Sterling Morris: Usually it's not just one. Honestly, it usually ⁓ again, like I said, with some something in the financials. ⁓ lot of business owners, ⁓ if it's founder led, right? I mean, ⁓ ⁓ this new thing that they find out, which is ad backs when they come into it process. ⁓ that process is actually very interesting for bankers because we get to find all the personal things that everyone's found out how they can ⁓ through their business. And then all of sudden becomes an EBITDA.
Amanda: Yeah
Sterling Morris: ad back for the buyer. ⁓ But I think all in all that it's something that's important as well.
Amanda: Yeah, add backs are always a really fun exercise in general. ⁓ That's when you get to know the business a little bit more intimately than before.
Sterling Morris: Yeah. Oh yeah. But like I said, I mean, it's usually the financials and then after that it follows something like, you know, just customer concentration, like I mentioned, in some respect, either it's the customers or contracts. If it's not customers, it's the contracts that you have. It could be vendors. There's just a lot of different ways that investors look at where there could be risk and when that business transfers. and anything if you don't have multiple alternatives and options, then still brings that forward. I'll tell you, Amanda, One of ⁓ more interesting points that comes forward that's ⁓ ⁓ funny is that there's still key man risk, right? A lot of founders are shocked ⁓ they come to sell their business. ⁓ one the things that comes forward is not financial.
Amanda: ⁓ yeah.
Sterling Morris: It's not your customers, it's not your contracts. It's simply, we can't transfer this business to anyone else because all the
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relationships are still with you and you're the key person. You're doing the day to day everything. and that, that parlay is into what happens next with the business, right? Naturally, anyone who does pick up that business is going to want you to stay on for a longer period of time. And usually if someone finally let business comes forward and say, I'm ready to sell my business. It's because they want to get out. ⁓ pretty much tomorrow if they can or in a very short period of time, but it's more common than not, I would say, where founder led businesses come forward and they're asked to stay on longer to support with the transition of that business than they initially anticipated. However, these things could be mitigated again, well in advance to our point earlier, if these things are thought through two, three years in advance. It's really, really something that I...
Amanda: Mm-hmm.
Sterling Morris: look forward to supporting with as well.
Amanda: And I think that's even more true with serial entrepreneurs. When they're ready to sell, they're ready, and they're ready to move on to the next item, perhaps. And hopefully, throughout their journey, they've learned now that sometimes it takes a little bit more patience and to stay on. When it comes to $5 million to $50 million businesses in that revenue range, it's very different from large corporate companies. What makes decisions in that?
Sterling Morris: Yes. All
Amanda: revenue range harder.
Sterling Morris: Harder, I would say like I kind of look at the growth trajectory of a business and the type of resources that business owners typically get exposed to. When working with larger organizations, what I saw is that they're more sophisticated. That's just the reality. And they have had management teams and leadership and all these operators who are very used to implementing things that are surrounding optimization. and ⁓ just like more efficient ways to run the business, right? A lot of times they're more versed in capital and ways to leverage those different financial instruments. But when you're working with a business that is ⁓ sub 5 million revenue, a lot of what they are exposed to and just getting the business going is a lot of the grunt work. So a lot of that just comes from working with fragmented advisors. ⁓ everywhere and typically they moved into probably like that 5 million to 25 million zip code where a lot of times the conversation starts to shift towards the cash people, customers and their own sanity, which is more of an efficiency thing that they run into. But the main thing that I think most are experiencing is really that cash. cycle cash management challenge that you typically see as the first thing that you find that they really haven't focused on just yet because their day-to-day judgment wise is really just making sure that the cash is flowing into the business, that revenue is up and a lot of business owners we say are doing bank financials so they just check their bank account up until that point and if it's up it's a good day, if it's down it's a bad day, if it's stable then great but A lot of the education really starts once you get past, I would say, two, three million in revenue. But yeah, I think that a lot of what their judgment comes down to is utilizing less information to make decisions, right? Because a lot of times they're not optimized. They don't have tons of information coming in because they didn't really know how to set up the infrastructure. So a lot of times they're making decisions with less information. And that leads to some of the best founders that make it to the point of five million plus in revenue. They have found a way to get comfortable with making decisions with less information. So let's just say, you know, a lot of folks are driven off of perfection, but some of the best we would say, and these smaller zip codes are comfortable with making decisions when they have 70 % of the information, because it's not really about making bad decisions and slowing you down, it's really getting to a place comfortably to keep the momentum going forward. And I think that that's one of the biggest things that we see.
Amanda: That's interesting. And that's a, that is a different take on it that when you are smaller, you do have less information. So you're able to make decisions for better or for worse with the less information that you have. When it comes to what you mentioned briefly, cash accounting versus accrual accounting. worked with many founders, like you said, who were only looking at their business on a cash basis. Is there a certain revenue mark for founders that are listening that you think they should start thinking about switching to accrual?
Sterling Morris: I wouldn't say offhand, think that as early as possible, quite frankly, with any business, is advantageous to switch to accrual. But what we've seen is I've seen businesses that are doing a million, three million plus in revenue where, you know, the founder is still doing the accounting and just because there's the customer concentration, there's not really a lot required from an accounting standpoint. So they still sit in the seat, but from an expertise standpoint, those things get exposed when there's a request that comes forward. So in the event that the IRS decides that they want to choose you this year, you start to realize that it's not just your accounting expertise as the founder, you probably should have some type of CPA who then would have been like, this would have been better if it were accrual based and all of those things and how those tie together. But I think as soon as possible is better.
Amanda: Mm-hmm.
Sterling Morris: but there's this educational aspect of things that need to take place. But yeah, for myself, having the background in the investment banking and starting our firm, I mean, we went directly into accrual basis and ensuring that we didn't adopt that mindset, but it only helps, right? Going back, if
you get into an ⁓ &A process and it's only cash-based, everyone's gonna try and figure out what the accrual looks like anyways.
Amanda: All right.
Sterling Morris: and it's, it's, it's something that founders typically have to learn when in reality, it's something they could do a lot earlier and, show real visibility into the profitability and the performance ⁓ of their So if you, if you're in the mindset, if you want to just run your business by yourself and that is ⁓ your baby you just want to pass it on, without having any external parties per take participate in doing an assessment and then, know, great. But at the same time, if you really want to understand the health of your business and you're planning on doing other things with it long term and having external parties look at it, it's in your best interest to do it earlier rather than later, be my view.
Amanda: And I would agree that really is a best practice for founder led or companies in general. For companies in that same size range of five to 50 million, why do you think best practices always translate?
Sterling Morris: I think that there's a lot going on that really inundated with information the biggest thing that you're trying to do ⁓ is ⁓ scale the right? typically you would want business to understand how to get these best practices in place. But ⁓ what we found is they don't know how, right? And then usually you just need to bring in some type of expert. they don't know where the expert is, then they try and go through some process. And now we're just inundated with a ton of technology. So what it means to implement best practices today, I think that we see a lot of founders in these businesses love the fact that they can say SOPs now. Before that was a word that was said, like, okay, we need to have an SOP. And some people said, no, things are working well. And now people realize that if you're going to get to a point where you...
Amanda: you
Sterling Morris: transfer the business, try and scale a business or anything like that. You need to have an SOP to best practices and ⁓ form of optimization in order for that to happen. But ⁓ think it's just they don't know. And I think that there is literally ⁓ so much information out there coming from so many different places that ⁓ ⁓ this information overload in terms of where do we start the process ⁓ lot of times ⁓ ⁓ ⁓ Sometimes the process just starts and they find out the way to make things work, but it takes some time to just get to that point where you're exposed to the right person who sits in the seat as an advisor and then helps you along the way to say, this is the path. And I've just mentioned to you, was at ⁓ &A South earlier this week ⁓ ⁓ see a lot of capital providers and that's in the venture capital space, that's in private equity. ⁓ And typically it's the capital providers that are the ones that'll come in and really hone in on what are the best practices that already exist within the business. And then they'll layer on their areas of expertise and their team and their resources to implement additional best practices, if you will, to drive that value forward. But usually it's kind of like you're on your own until you get to somebody who can help you, because you're just trying to protect the business. and continue to operate it at a certain point at those levels.
Amanda: When it comes to technology and information overload, a lot of people are talking about AI right now. For founders being told that everything will change in three years and sometimes sooner than that, what do you see that, in your opinion, actually matters right now?
Sterling Morris: Yeah, I think that like many out there, I'm definitely keeping a very close eye on it. ⁓ I do think that it is going to have a pretty big impact on all things. How soon it happens, I think that there's a balance. Honestly, Amanda, the more and more I think about it, I think that there's many people out there who still think that it's insane when they say it's gonna happen in three years. And then there's people out there that are claiming that it's not going to happen for another 15, 20 years. I was just at the conference and on stage, they said that it's not going to happen in the next three years. but ultimately I think it's somewhere ⁓ between. I think that when it comes down to, to leveraging it overall, we just need to have founders really lean into understanding ⁓ what what the capabilities are. ⁓ to point, ⁓ I that, ⁓ really.
Amanda: Mm-hmm.
Sterling Morris: utilizing it and for myself as well, utilizing it in a way that accelerates your way of thinking. think that it is ⁓ great tool ⁓ will help you ⁓ idea generation. First and foremost, a lot of ideas start somewhere, but ⁓ can be a great tool to expand very quickly upon initial thoughts that you have. It's great with pattern recognition and then just overall creating drafts towards things. but in no capacity has it reached where it can understand what's going on with your business, right? You'd have to prompt it to the end of time. But truly understand what the secret sauce is, if you will. It doesn't know how to read context essentially between two people or reading a room, if you will, if you're going from that perspective. Or ⁓ it just can't. fill in the gap of a sense of trust, right? So what we see is that it is, and what a lot of folks describe as being sort of that foundation, if you will, it could be the first crack at things, it could be the way to expound on these ideas, but it certainly won't be the last staple of authority, reputability, and the foreseeable future, at least from my perspective, which is something I think will last for a little bit until... We can find out what those look like, but I think that overall it'll be something that continue to stay focused on.
Amanda: Yeah, the human element is still critical when it comes to AI and AI implementation, making sure that's a through point in all aspects. When it comes to small
businesses, where do you think AI is genuinely helpful and where may fall more into the trap category?
Sterling Morris: I think that ⁓ it's generally helpful when it's doing tasks, right? I think that, again, with the ⁓ generation, it's very helpful. ⁓ when it's doing tasks and ⁓ these drafts and all those types of things, it could be very helpful from that perspective. It could be great with scraping and doing industry research, at least initially. doing some screens, filling in some information. It's great at processing information all in all, but I think overall you're going to have to have a human put the stamp on whether or not it ⁓ makes sense, right? And I think that that's just, that's not gonna go away. think that those ⁓ ⁓ that are gonna thrive in this environment are really gonna be still those who have a knack for ⁓ to continue to be educated, Because at least from my, ⁓ See, I think that the AI, it's kind of like data. I mean, we're in technology, so it's kind of like data. If you provide poor data, it doesn't matter how great your ⁓ solution is. It doesn't matter ⁓ many reports you have. The foundation is the data, right? So I think about it in the same way where humans are still the input, if you will, and what you're looking for. So if the human... ⁓
Amanda: Mm-hmm.
Sterling Morris: is not as versed, as adamant about just doing research, getting up to speed as much as possible, then just having a knack for whatever their expertise is supposed to be, the AI can quite frankly only do so much, So we'll continue to see those founders who really do deep dives in their industry outside of AI and just use AI to leverage it all in all to expedite decisions and things like that.
Amanda: And you've said something really important, that humans will remain the ultimate decision maker. Why do you focus around that aspect?
Sterling Morris: apps. Yeah, think that we've had this conversation, so that's great. what we see is AI is really good for business owners who have less capital to deploy. I think that one of the things that we're very grateful for and what AI has been able to provide is access, right? A lot of business owners we see now, and you can go on Instagram, can go on LinkedIn, there's tons and tons and tons of tools that are able to do these things at a very low cost, right? Like you can go online, you can have someone, you can have, at first it was everyone figured out using Upwork and Fiverr and all these things and these business owners that were smaller in scale thought that that was great. And I would say sub a million for sure, because once you get larger, it starts to depend, but it became more accessible for business owners to now use AI, mean, like I said, there's a million tools out there that are very, very affordable and essentially say replace your entire branding and marketing efforts, the person you have on Upwork, the person you have on Fiverr and just let our AI do everything. And that works, Amanda, for business owners that really haven't reached a point of like true brand identity that they've built over years. So what we'll see is that, you know, the human component will naturally be so much more stabilized and will remain critical to the process for brands and businesses that have reached a certain level of scale because somebody still quite frankly needs to be held accountable, People really wanna make sure that whoever made this decision, you can't just point back to AI. So we think about it ⁓ like a business such as a Coca-Cola ⁓ in business for however many years you think of an Apple. ⁓ Those businesses are not going to convert. They'll find ways certainly to seek advisors and want to find ways to do brand new marketing more efficiently, whether that be within their internal team or using external advisors in terms of parties to do brand new marketing outsourced who are leveraging it. However, you will want to have a human being who's very, very, very versed in it and understands how to leverage it to make real decisions. because if something goes wrong and either the Coca-Cola ⁓ brand goes or the Apple brand, something because AI just decided to hallucinate on that post. There's too much risk and ⁓ people just aren't gonna get, I think people just aren't gonna be comfortable with signing off there. So we think that the way the market is gonna shift is you're have AI certainly do a lot of the work, if you will.
Amanda: You you
Sterling Morris: But you're going to have this evolution of folks who are really, really, really highly critically ⁓ experts in their industries that are going to elevate to the top to have these conversations to ensure that these things are being protected. Because it is a great tool, right? It's going to be great. It's going to do a lot of great things. But still, the brand experts, ⁓ the people in finance and accounting are not going to, at these levels, going to rely on
Amanda: Mm-hmm.
Sterling Morris: on the QOV, the earnings call report numbers being strictly from AI. Someone's gonna have to sign off. So I think that's the trim we're gonna have. Like you can't blame it on chat. And I don't know if Sam Alton is gonna take on the liability or any of the others. But ⁓ I think that that's what we feel pretty comfortable with and from an advisor standpoint and what we hope to do and are striving to do is just to be those experts, those point of contacts that understand how AI works.
Amanda: Yeah ⁓ Right. you
Sterling Morris: across each of these functions, but at the same time, leverage it to the capacity that can be. So that way we're offering an efficient way for our clients to operate, which is going to be necessary. And a lot of folks are going to leverage it. So we want to make sure that we implement those, but we keep that advisory piece that preserves brands and businesses, not for the short term, but for the long time.
Amanda: And as more and more tasks get automated, my line of thinking is typically that the
qualities and leaders and advisors start to matter even more. What qualities do you think are going to start to be most pronounced or looked at most now that tasks are automated and people are really looking for those qualities and leaders?
Sterling Morris: Communication. think, before communication was one thing, but I just, truly believe that the future we live in, it's kind of like we're going in the opposite direction where AI is, and this technology is doing a lot of the task. And before it was a lot of communication, a lot of relationships that humans had to do just to kind of get things moving within our economy. and running around and doing all these things. then effectively like, technology has come in and it started having people do other tasks and all these things. But ⁓ I that first and foremost, communication is going to be the key to any type of advisory type role. ⁓ It's going to be more critical for business owners. ⁓ I that ⁓ relationship the soft skills, if we want to just kind of wrap it up, but the soft skills are going to become the most valuable thing for humans in the future. So ⁓ I'd highly recommend the things like Toastmasters and all the different presentation skills and all of those, because people are just gonna be needed for that. No matter how complex business gets, you're gonna have to have folks that were able to effectively communicate it because technology can try it and they're gonna replace us with robots and things like that, but you still can't point to robots when. real critical decisions are at hand and stakes are in the line, folks are going to want to point to a human. I think that that's the way we look at it.
Amanda: And that is interesting, if you will, because a lot of communication these days does come down to AI writing emails or even being receptionist for some companies and things like that. But what you're really focusing on is communication skills and that soft set of skills and the ability to publicly speak and also communicate your own thoughts precisely.
Sterling Morris: Yeah. And I would add Amanda, critical thinking skills. Like one of the biggest issues that we'll continue to see is AI is replacing the fact that, you know, a lot of folks don't think they have to think, you know? ⁓ And that's, I think sort of what I was alluding to earlier, but I think critical thinking skills is going to be one of the most valuable things that starts to evolve over time. People who can think creatively about solving
Amanda: Mm-hmm
Sterling Morris: problems and leveraging AI were needed. But again, I think it's going to be the communication aspect. that I think is again interesting just because socially we see that social media and technology and all these things are now creating a society that talks less to each other. So see what that looks like in the future for the students that are evolving through the system now. But I do think that the communication is going to be key, the relationship building. A lot of folks have been behind these chairs and behind these desks doing a lot of the coding and a lot of the building of the infrastructure that's no longer needed. And some folks have been able to be in the basement and crank out numbers for a number of years. we think of like Auditors and actuaries and things like that. mean, people are going to have to communicate and they're going to have to communicate about very complex things. It's not going to be surface level anymore. So I think that those are going to be very, very huge.
Amanda: Yeah, I think critical thinking is a great point to bring up and I think I could do an entire episode on how our critical thinking system may evolve or how we should handle the education system, but that's another episode. If a founder is listening today and could only focus on one decision layer over the next 12 months, what would you recommend?
Sterling Morris: Yeah. ⁓ yeah. decision layer. I would be hyper focused on optimization. And the reason I'm using that term is because it is related to the financials and it's related to the SOPs and the best practices and the optimizations slash efficiency that we discussed earlier. So over the next 12 months, if I were any business owner, first and foremost, I would make sure that I optimize the financial profile of the business or whatever that means for your business. So do a deep dive to understand what are your cash flows look like. Optimize the use of your cash flows. That's one of the biggest things that we see is a lot of times folks come to us seeking capital, right? We need more money. We need more money. We need more money. My response is over the next 12 months, optimize your cash flows, right?
Amanda: You
Sterling Morris: to ensure that dollars are being allocated in the right place, which is something that's so important. And then on the flip side, optimization of your just business processes. So starting with the SOPs, starting with the just the efficiency in terms of AI and all the things that can be leveraged to generate additional value within the business. But I think that optimizing the cash flows first, and then secondly, ⁓ ⁓ processes ⁓ figuring out how you can implement technology to get some of your time back is very important. And then for those out there, ⁓ last piece, like I said, do some research on areas of concentration that you may be aware with and strategically think about ways this year to... to die risk some of that. just optimization, if you will, in lot of key areas would be my advice.
Amanda: Okay. That's one large decision layer, optimization. To close this out, what's one belief about growth or value creation that you've changed your mind about over time?
Sterling Morris: Hi. I've changed with understanding again that it's all about just going and getting revenue. think that I've become more disciplined and which I think a lot of founders should be and how they build their businesses. But I think when it comes down to the revenue and growing the business overall. being more disappointed about what it means to go and get new clients, right? Like actually spend time with understanding, you know, do your research, understanding what your ICP is and being patient about getting to that ICP versus spending a lot of time, money and capital, just trying to reach anyone. think that I've learned that in real time, we focused here at our firm at businesses that had a hundred thousand to a million in terms of, you know, testing out our model.
Amanda: Mm-hmm.
Sterling Morris: to ensure that it works. And we received a lot of great feedback. And then we refined our ICP to understand that we wanted to focus on this zip code with five to 50 million revenues. So we're super excited about that. But I think that that was one of my biggest points is being grateful for the time that we spent and recognizing that there is such thing as a test period. There's ⁓ true value in being in stealth mode and making sure what you're building works. But understanding very clearly who you're trying to target and getting to that audience is more valuable than just scraping the universe and cold calling, which I think a lot of AI doing now today to tie that together.
Amanda: I'm Yeah, and it's always okay to test the market, but I agree with you. And sometimes testing can get you to your ICP a little bit more quickly than you otherwise would. Well, Sterling, this has been a great conversation. Thank you for bringing such a grounded perspective to our listeners. And for our listeners, thank you as always for listening to the Madison Advisory AI Podcast.
Sterling Morris: Exactly.