Don't just measure return on investment, measure your return on engagement.

[11:11]

"If a company has a return on invested capital of 50%. That means we're going to make 50 bucks for every dollar we leave in that business. And in my own business, we have a return on invested capital of of 200%."

[25:18]

"My $1 million insight is as as the new generation comes into family offices and the businesses change hands, don't just measure return on investment return measure your return on engagement."

[05:34]

"2015 had 11 rental properties and then that's where I got into real estate syndication, buying apartment complexes. Today, as an operator, over $2 billion of real estate acquisitions."

Full transcript

Don't just measure return on investment. Measure your return on engagement. The truth is you need to invest in the person and you need to invest in systems. Keep the founder in place. Let them take some equity off the table and really pour some fuel on the fire by installing a few um a few tools. NextG is is really key, really important to be able to make money, but if we can't pass it on, the money goes different directions.

In this episode, we explore how family offices are scaling smarter. Let's dive in. And just want to introduce our panel here. Very excited about this panel to get started. The first panel of the day, growth focus finder. How investors are leveraging their entrepreneurial roots, nextgen family members, and unique models to allocate and scale.

Um, you know, just take two minutes to talk a little bit more about you, what you're looking for, you know, what your business is, what your family office is, and uh just give us a two-minute introduction for the room. We work with family offices to deploy funds into um directly into corporations. We really act like a executive producer for movies. So uh we find deals that are attractive.

We bring in the capital. We bring in the management. Uh we facilitate the relationship with the seller and then we close the deal that way. Thank you. Well, first of all, I want to thank Richard and uh his staff uh for having this event here. I love Honolulu.

I I vacationed here a lot and also got married here. Uh we facilitate for family offices. I owned a financial planning firm for 30 years. Uh during that time I focused very much on entrepreneurs and business owners. I did that primarily for several reasons. One is that business owners and and entrepreneurs are people who need information now.

They can't wait a month. Uh even though we all know tax day is April 15th. Uh what's interesting about that is that maybe a particular entrepreneur or business owner is in a position where they need to be able to have capital at that time. So we have to plan for it. During that uh the time that I was at the financial planning firm.

One of the most interesting things about it was is that in looking at how individuals in this country are uh uh have individuals in this country who have a a $10 million net worth or more are one one half one and one half% of uh of the individuals in this country. So the idea is that what we want to do is facilitate work with business owners and provide uh the services. I believe that uh my my purpose on this earth is to have meaningful conversations with with business owners and entrepreneurs and also with our family office clients so uh we can get them everything they need. Thank you.

Thank you very aloha. I'm here from Maui and uh in the Hawaiian culture um everybody's very active so I know we've been sitting a long time. So can we can we stand? Would you guys would you guys do that for one second? Nice. I like that stretch back there.

That's a 10. That's a 10. Um I'm originally from Denver, Colorado. Uh I graduated with an MBA from the University of Denver and have completed an entrepreneurial masters program at MIT as well as executive education programs at Harvard and at Wharton. Um keep standing and stand with me if you in your business or in one of the businesses you invest in use a tool like trrenle.

If you don't use trrenual, if you never heard of it, sit down. Sit down. Sit down. Good. Good. Who here has used Loom in their business?

Loom.com. Loom.com. Okay. If you're still, if you're doing that and you're still up, good. Otherwise, sit. All right.

Who knows what EOS is? Entrepreneurial operating system. All right. Anybody still standing? Are you a legend? Okay.

If you don't know what those platforms are and if you've never used them in your business or in a business you invest in, don't leave the conference without talking to me first. I'm a founder at heart. My business is in the manufacturing industry and we've I I literally started it in my basement and it's a product that you've all literally held. You probably held it at dinner last night.

Um since since founding a company and and starting a couple more both successful and what I call expensive pieces of education, also known as a failure if you're a founder, um is that systems scale. It used to be that people would invest in in people and and that was a great thing to say, but the truth is you need to invest in the person and you need to invest in systems that will grow and scale. And the tools that I just mentioned are some of my favorite [snorts] tricks. They're super easy to implement.

I don't work for any of them, but I love them. I use them in all the companies that I invest in. Um, and I I really want to thank you guys for for being here today. I hope this panel provides a lot of value. So, um, thank you so much. Thank you so much, Kyle.

I appreciate that. That's definitely the Hawaiian culture right there. Um, being active and, you know, hiking quite a bit, which is why Richard moved out here. Um, how about you, Lane? Can you tell us a little bit more about yourself? Hi.

I, uh, grew up here in Hawaii. I, uh, had a one I got a onemony, so I'm not allowed to travel. So, thanks for coming all the way here just for me. For sure. [laughter] Um, so a little bit background on me in a previous life. I used to be an engineer.

I bought rental properties very, very early, right out of college. 2015 had 11 rental properties and then that's where I got into real estate syndication, buying apartment complexes. Today, as an operator, over $2 billion of real estate acquisitions. Um, but as you guys all know, interest rates went up the last few years. So, it's hard to make deals pencil with the holding costs, insurance, taxes, etc.

I got one of my properties taxes went up $150,000 to $300,000 in the last few years. So I also stand here as a multif family office representing my clients money to find deals outside of the world of real estate. So I wear a couple hats, real estate operator, multif family office. Thank you. Thank you. It's a really complete panel.

We have a little bit of tech, real estate, uh a lot of different managers here. So when you guys are looking at opportunities right now, what are some of the things that are very exciting? You know, I know some of the conversations earlier there was some geopolitical risks and different things happening right now. So how are you guys going through due diligence?

What are some opportunities that you're finding and can you talk a little bit about some of those uh deals that you're sourcing right now that are very exciting? You want to get us started? Oh, sure. So we really love the lower mid midm market. We're talking about enterprise value 20 million up to 100 million. And for these companies, there are thousand of thousands of them coming online right now for sale.

They were created by baby boomers or, you know, back in the the the 80s or so. And now the owners want to exit. They their children don't want the companies or some cases maybe not really qualified to run them and they do the right thing and they want to put those companies on the market and they are profitable. They've gone through several recessions and um we think those companies are primed and in fact we really think they're undervalued by definition because what happens is you get an owner that's had a company for a very long time.

He makes good money. He makes you know whatever the salary is for quite some time and then he gets to a point where he didn't he may be underinvested in technology. He may have not included new processes. In fact, most recently, we came across a company, a $50 million HVAC company in California that um we love the company.

We asked to see the sales team. The owner said, "I am the sales team." So, obviously, that's an opportunity for us to come in and say, "Okay, well, that's concentration and sales process. Let's we're going to have to knock the value down a little bit because of that, but at the same time, that's an easy way to bring in a professional manager, build out a sales team, and really grow the company organically.

And then, like I said, this is a company that's almost 40 years old, very durable, been through many recessions, and has really come out of COVID like a rocket ship because of the Northern California market. And um that's just one example. And we think that there's we're starting to come across uh in our portfolio couple of dozen examples like that of companies and different businesses. Yeah, there's been a lot of conversation surrounding the silver wave of businesses and now with the wealth transfer happening, I know Michael Scott that's in the room is really big on that.

Um have you guys seen anything like that or any other particular deals that have some uh promising returns coming up? Yeah, my my family office is called Winward Equity. And my favorite type of business to invest in is one that's founder where the founder has the business has outgrown the founder and the founder is literally trying to do everything from being the the chief sales guy to he's doing the hiring. He maybe he's doing 10 million with with maybe 1 to 2 million in IBIDA, but he's he's the bottleneck of the company and maybe doesn't realize it.

Because what that allows you to do is is plug in some tools that will allow that business to scale. You keep the founder in place, let them take some equity off the table and really pour some fuel on the fire by installing a few um a few tools. We one of my favorites is is EOS or the entrepreneurial operating system. And what that allows you to do is give every single person within the company a number and they're going to chase that number on a weekly basis.

Now, it's designed to be achievable, yet they've got to concentrate and they've got to focus to hit it. And they're going to maybe hit that about 80% of the time if they're an A player. And what that allows you to do is is build out a leadership team so that the the primary founder, he or she can then focus on what they're best at. What is their superpower as the founder?

Let's get them focused on that because it's probably not everything. At least I haven't met that founder yet. And if we can build out a leadership team that gives them the the resource that they need to grow, let's get them an outsourced CFO. I want to see those books every week. We do weekly accounting at all of my businesses.

We literally close the books every Friday for the previous week. It's not very expensive to do if you're using outsource accounting. If you're doing insource accounting, you can have that done um by the end of the week. Making a decision on month old data, it's too slow. The world moves way way too fast for that. So, weekly accounting and have a great CFO, the number that I love to see and that I check for first, which is typically ignored, is called return on investor capital.

And here here's what that means. If a company has a return on invested capital of 50%. That means we're going to make 50 bucks for every dollar we leave in that business. And in my own business, we have a return on invested capital of of 200%. And now, why do I like that number? Because what that means is if I were to exit my own $40 million business, manufacturing company, I would literally have to do better than 200% returns year-over-year in order to make me want to sell this business and get into something else.

So, return on invested capital sounds good. And then this question now is for Lane and Neil since you guys are advising ultra high net worth families all the time. How are you guys scaling and maintaining uh their balance sheet right now? Well, I think you got to look for unique opportunities. I think that's the first thing and maybe a niche that you wouldn't normally go into.

Uh, one of the areas that I've been looking at, believe it or not, is is RV uh, RV areas with different parks and the real estate with regard to it and all of the ancillary cash flow that's involved that comes with it, which is really nice. That's ongoing. But from an appreciation standpoint, if you can find properties, as an example, that you can create the value ad, then you can 2x and 3x it sometimes. So, that's very unique.

It gives you the cash flow plus also gives you the opportunity to be able to to have the appreciation over time. Sounds good. How about you, Lane? So, we have a little bit of more contrarian point of view. I'm just a dumb real estate investor. I don't I don't think I can predict when big ideas will fly.

So, I invest off of P&Ls and financials, right? I mean, that's why I like apartments because you can look at the last two years P&Ls, see the run rate. Um, we've developed 500 mult multif family workforce housing in the past, but that's about the only thing that we'll do that is kind of a a guest shot for us. Um, I think what's been successful for us is finding people that we've kind of grown up with.

I think that's our unique thing is we are grassroots. So, general partners, vendors, like these are the people that we're finding a deal flow from because we had a previous working relationship. So case in point, when we were kind of going through 2022 to 2024, we needed to bring in contractors that needed to work with us on pricing. So where did we find those people?

Through our relationships. And these are the same people that we worked with who also have big family office portfolios who bring us in the deal. And these are these kinds of relationships that we've kind of found from a grassroot point. So it's not particular any industry, but it's more the people and the relationships that we've kind of worked through by first kind of working as a vendor or consultant first.

Yeah. And that's something I always advise to some of the firsttime capital raisers in the room. A lot of investors and family offices, they're not looking to do one-off deals. They're looking to find partners that they can grow with. Um it's kind of like dating. So I really appreciate you mentioning that point.

Um so now regarding you know real estate and other core industries uh how are some ways that you guys are you know utilizing special deal structures or special technology um to kind of enhance some of the efficiencies or um opportunities there. Anyone want to jump in on that one? Uh so for real estate deals, it's very common that a developer gets stuck without a couple he needs a couple million dollars, right? Their funding gets cut short, the banks freeze up.

We've been in the situation ourselves, right, as operators. So we empathize very well when people run into this type of situation. I've seen a lot of deals come through like Austin where this is the case, right? And this is where the opportunity comes up. Hey, so and so needs $2 million to get over the hump. We find a lot of these relationships by working, again, this is with grassroots relationships with the real estate brokers.

I mean, how many family office people talk with brokers on that level? Well, we do, right? Cuz we're on on the level. Um, so those are opportunities where somebody is a little desperate for money. We can work with that. Yeah.

Allows you to see deals first and a better valuations. Anyone else? Sure. Um, one of the things I would tell everybody here is that look at the last tax bill that just passed on July 4th. It has a ton of incentives for fine deals, right? And you know, part of this is kind of what we do is we look at um directing, we help direct investments in the CC corps and specifically in that area, you're going to have some opportunities uh for they've increased the capital gains in the small business uh credit.

So 10x up to 15 million you of your capital gains is going to be taxfree. Also, they've added a rollover. So, you'll be able to roll that into other investments post that. Now, granted, the the the application here is that you do a five-year hold on these investments. And in addition to that, they just announced um uh investments into opportunity areas.

So, what that's going to allow us to do is it's going to give you either larger exemptions. So, if you can find a company in a rural area or maybe a depressed area and you can make a direct investment into that CC Corp, then you'll have an expanded opportunity to get um uh uh taxfree returns on your capital gains and 5-year holds. Thank you. And regarding, you know, NextGen, I know we mentioned a little bit of the silver wave.

I know some people are utilizing seller financing and kind of helping some of these boomers retire, which you know, their time is more important than the business itself. Sometimes they want to do things that they probably haven't had the chance to do the last 30 years running their business. Um, so are you guys implementing any NextG programs with any of the investments that you guys are doing right now? Yeah, I'll take that one.

One of the key pieces in investment is is getting the right people in the right seats. And my thesis at MIT was on a system that I developed using AI and automation that for recruiting and hiring. And and here's here's how it works. And um I'm probably not the first person to invent this, but all hiring will will go this way.

Um I I can also teach you how to do this. And effectively what we do is we need to hire a new director of whatever it is at one of the companies. They have a seat they need to fill. So the tool that I built uses my own LinkedIn profile and we set a geographic area. Um maybe it's the US, maybe it's local if they need to be in person and it looks at everybody's LinkedIn profile that's public, their current title and it reviews reviews what they have put there.

Now, if it thinks they might be a match against the job description, this AI tool says, "Hey, so and so, I think you might be a great fit for this role. Here's a link to apply." As soon as they apply, we have them take what's called a culture index survey. Now, this is going to tell us who they innately are as a person.

Right person, right seat. Okay? Then from there, when they upload their resume, the AI tool is going to look at their resume, their culture index survey results, who they are as a person. And then it's going to look at their LinkedIn profile that's public. And then, oh, by the way, we're going to look at every single thing they've ever done on LinkedIn, every post they've ever posted, everything they've clicked like on, who's in their network, what comments have they posted that might not be good.

And what it's going to do is it's going to build a profile about this candidate. Then it's going to export to Google Sheets and it's going to rank order them. So as people apply, it's going to reshuffle um and rerank all those people every single time somebody applies. And what it allows us to do is then interview the top five people that applied for this position.

And it will also tell us here's their strengths, here's their weaknesses, because it's compared everything they've submitted against the job description. And it gives us a list of 20 questions that we give to that founder or whoever's in the recruiting goal recruiting role at that company that they're going to ask that candidate in order to make a great hiring decision. That definitely saves a lot of time, but I think that uh Lane is going to mention now the qualitative side of things a little more. Yeah, I got a low tech and high-tech solution.

So the low tech solution cuz we had to cut our underwriting staff um when in last few years because we weren't in acquisitions mode when interest rates went up. So we would just send deals to our brokers and then the lending broker, right? Um hey, we're going to qualify on this one. This thing going to underwrite. So they didn't really like that after a while because they caught on to that little game.

Um, but then the the high-tech solution when AI came on board and with Russell's AI things, you guys see how this stuff works, right? I have like kind of a checklist of 12 quant quantitative things like, you know, like things that like people will fudge, you know, like are the property management fees in this range? Is, you know, if the laundry isn't implemented in, what range is this in? Like you know not all 70% or more of your units are going to adopt laundry washer units etc.

But you know quantitative things to kind of spot check and then if it doesn't hit on that we don't even waste our time. You know a lot of people in our in industry say they look at like a thousand deals. I'm like oh that's a waste of time. Why would you spend an underwriter to do that right?

But you know I would say we we probably go through a couple dozen of deals every quart. We try and find one good deal a quarter to do. Um, but then you know AI has kind of made that pretty easy. Of course, you know, we then have a human do it, right? But AI helps. That's great.

And and Neil, what are some of the things that that you look for um when your families are looking for new investment opportunities like the RV parks? Aside from track record and you know the team, what are some other things that you look for both from a qualitative and quantitative standpoint? Well, for the majority of what we're doing, we're really trying to be more conservative. I mean, we do want to be aggressive with the percentage of uh of the assets, but the key is that I really look at three things.

I mean, particularly with what's happened over the last 10 or 15 years, we want to make sure that we're looking for people who've been around for 10 years and been successful for 10 years. You know, longevity is really important. We want to be able to make sure that their asset base is large enough, you know, billions plus, so that we're in a position where the third one is, of course, if something happens like a pandemic or what, eight interest rate hikes over a one-year period of time that poof, you know, the assets's not gone or that it's a long time to recover because recovery actually is more important really if you think about it than return. I mean, it's great to get a nice return, but if you look at the recovery periods in real estate and stocks and a variety of other things, you're looking at five or six years just to get back to even.

So, I'm just not a big fan of losing it and then being in a position where I got to recover. That makes total sense. Um, before I open it up for questions, can we just go down the row and just provide the audience with a million-dollar insight, whether to avoid a mistake, um, or, you know, something that has really helped you get to that next level. Um, first insight out to tell everybody, look at the tax bill that just got passed.

Um, it's something I spent a lot of time on. It's going to be a lot of goodies for the people in this room especially. So, it's going to be things like we just talked about the opportunity zones. Has been expanded the uh also being able to expense more. So what this means is an investment you make into in a small business and I'm thinking the kind we focus on between 20 and 50 and in enterprise value that investment is going to be easier to expand and give you a tax-free return and then you can roll over to the return into a small I mean um into other businesses.

Um, also just just another quick point too is that um expensing you'll be able to expend if you buy into a business now and that business will you know spend $2 or $3 million on technology or whatever that we'll be able to expense at year one and that's going to be a boost to your IR. So it's something to consider as well. Thank you Neil. I'm going to go a little different direction here.

I think it's amazing that uh you can create some incredible wealth, but what about the next generation behind it? You know, kids, grandkids, have has anybody really sat down and looked at how how that's going to affect them and what you're really doing? I mean, NextGen from that standpoint in my case is is really key. There's a a state planning attorney uh who works with very wealthy people in Phoenix where I spend my my winners uh crack uh Christine Craola and her took her father's notes who is kind of I think the godfather of uh of nextgen and wrote a book uh called fortune favors the bold and he talks about the Japanese and how hundreds of years the mitabisses and theudas and the things that they've done in detail 12 and 15 steps to be able to make sure that the wealth that you all and all of us are helping people generate is going to go to the next generation.

And there's a lot of major challenges and I think it's really important to be able to make money. It's great to be able to be in a place where we have all the ability to do that. But if we can't pass it on and if you look at the stats for generation to generation, you're talking about next generation is around what 3540% third generation is around 12%. The money goes different directions because of divorces and problems and things that happen.

So, if you're not doing some of that work in your family office, I think it's something that's really important. Absolutely. There there's a saying that aside from, you know, in order to transfer wealth, you must transfer values and principles and you got to bring in the family members to have full transparency um for that shift to happen. And if anybody anybody wants a copy of the book, let me know.

Yes. And now really quickly so we have time for questions. Uh Kyle, what's your $1 million insight? My $1 million insight is as as the new generation comes into family offices and the businesses change hands, don't just measure return on investment return measure your return on engagement. So if you're evaluating a company for your family office, check to see are the customers of that business raving fans.

If they jumped their prices 50%, how many customers could they keep? Because those are the businesses that are stable. Those are the ones that are going to resonate with the next generation. The ones that are working on renewable energy, um, recyclability, climate friendly stuff, things that in the past maybe sounded like a nice to have with the next generation, they are absolutely a musthave.

Thank you. So we we focus on multif family real estate because that's how we operate. But when we go outside of the real estate world and we did some online businesses, we will usually go out to and bring in a third party consultant. Um usually this person is our friend because we have a lot of friends in different groups, a lot of founder groups, but we'll usually throw 30 grand at them.

So maybe call this the 30 grand rule. I don't know where that number comes from. If you multiply it by 12, $350,000 a year is a nice, hey, that's a significant amount of money plus or minus 50 grand, who knows? But, um, you know, just to have somebody on there to give you a third party insight or like a third party report, um, you know, look at P&Ls.

If I was going to look at a CPA firm to buy, which in I would be really interested in looking at for an AI firm as opposed to just a Philippine outsource deal like that. Um, but I would bring in a one of my CPAs that we use to come in and just look at the books and verify things for us. Yeah, double clicking on that. Daniel mentioned that earlier.

Um, you know, focus on what you know, know your strengths and weaknesses, do a self-discovery assessment, and then, you know, hire other people that can bring that missing piece. Um, so do we have any questions in the audience for our panel right over here? Um, just one second till the mic gets to you. Thank you. Thank you, Charlie.

So, uh, uh, thanks everyone. Uh, Kyle, this question is for you, right? So, you talked about renewable energy climate. Um, uh, a number of you folks have talked about manufacturing as well, right? When you look at the geopolitical situation, um, you know, clearly there's a lot of interest in kind of bringing, I guess, advanced manufacturing perhaps back to the US.

We used to be really good at it. We're not as good at it anymore. You're an engineer who went into real estate, you know, it would have been great if, let's say, manufacturing could have been a a good opportunity. Um, what I found in trying to invest into that space is that a lot of investors are skittish about it in the US.

Um, I find a lot of investors from Asia or from Europe uh much more amenable to invest into those highly innovative kind of new technologies, new areas. It's much harder to find US investors. They prefer much more to just do more real estate. Any any advice for folks who are actually trying to do innovative manufacturing technology in the US?

Yeah, I'll uh thank you for the question and I I commend you on that because it's a as as you know that's a bold statement um to figure out how to back US manufacturing when over the last 50 or 100 years it's all it's all gone overseas. Um I I think there's a ton of money to be made in that. And in regard to the political climate, I try not to get too tied up in it or worried about what's going to happen because anytime there's change, that's actually a great thing because now there's an opportunity. Businesses may be forced to manufacture in the US.

So if we can get involved in those industries and those businesses and the startups and founders that are excited about that, let's do that. If it changes um the policy changes in three four years um may maybe there's another opportunity there but when whenever there's political instability there is a huge opportunity in business you lean into the difficulty and US manufacturing is difficult firsthand knowledge here but what's incredible about it is there's still a lot of people that love made in the USA plug those are your first customers go there first and uh I I wish you luck I'd love to catch up afterwards Thank you. I think we have time for one more question. Okay.

Well, can we give it a round of applause to our panel right over here? Join the family office club by visiting familyoffices.com. We look forward to seeing you at our next live event.