Ian Schnoor is the Executive Director of the Financial Modeling Institute (FMI) and Founder of The Marquee Group, a leading financial modeling training, consulting, and accreditation provider. We discuss financial modeling essentials, the basics of giving equity to your employees, and effective ways to attract and retain good employees.
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Fear Not To Share Equity With Ian Schnoor
My guest is Ian Schnoor, the Executive Director of the Financial Modeling Institute or FMI, and the President and Founder of The Marquee Group, a leading financial modeling training, consulting, and accreditation provider for finance’s most important decision-making tool, the spreadsheet-based financial model. Ian, welcome to the show.
Thank you, Steve. It’s a real pleasure to be here. Thanks for having me.
If this happened many years ago, I would be extraordinarily excited because at the time, I was doing a lot of financial modeling and I was very into it. I’m not as into it now, but I’m still excited about having you on the show and bringing me up to date with what’s happening in the financial modeling world. Tell me, how does one become a financial modeling entrepreneur? How did you get here?
I would describe myself as an accidental entrepreneur, as I’m sure is the case for a lot of entrepreneurs. We didn’t grow up and at five years old say, “I want to become an entrepreneur.” I don’t know that many people do. Based on my background and my personality, I thought I would be a corporate person for my whole career.
I was always very interested in paying attention to what I was thinking and listening and being adaptive to change. I started my career as an investment banker. As you mentioned, I spent six years in banking. At the time, all banks trained all their own people. Every year a new cohort would come in, a bunch of new juniors would come in, and they would call people that were a little older me to train them.
Every year, they’d say, “Ian, the new guys are coming. We need you to train them.” I’d say, “Okay.” I’d be working very hard. For a couple of weeks in the summer, I would be teaching all the new hires that had joined us. People always ask me, “How did you decide to leave banking?” I didn’t. That was an easy decision. That decision was made for me.
I always tell people that if you stick around in banking long enough, someone’s going to make that decision for you at some point. It was after 9/11. I was working at Citibank. There were cuts every week. They were cutting offices, groups, and people, and our team got cut towards the end of 2001. The decision was not should I leave. The decision was what to do next.
I had a couple of opportunities to join other banks right away, but it didn’t feel right. I’m glad I listened to myself. I didn’t feel ready to jump back into another banking role. I paid attention to what my body and my mind were saying. I thought about it. I thought about what could I do and what I like to do. I always loved teaching. That’s how I got to a university. I tried to tutor people.
I like teaching and modeling. I thought maybe I could try offering up the service to run modeling training and even some modeling consulting. I did that, and I thought I’ll do it for 3 to 6 months to take a break from corporate life. I’ll take a break for six months, and then I’ll go back. It’s been many years. I haven’t gone back yet, but such is life. It was in a circuitous way. That’s how it happened.
I’m so fascinated to hear that because I was in a very similar situation. I was at ABN AMRO Bank, which was one of the competitors of Citibank at the time. I got the X about a year later than you did. I think it was September 6th, 2002. I rallied the opportunity to get out, do something else, and do my own thing.
Anyway, you decided to teach people and to stay with financial modeling and get into it. What I’m really curious about is, how did you turn it into a business? It’s one thing to do some modeling on the side, get some clients, and teach people. You’re turning it into a business, growing it, and make it a scalable business. It’s a much harder proposition. What happened?
I appreciate you recognizing that because you’re right. Like a lot of teachers and trainers, when I started doing this many years ago, I was a solopreneur. I like to say it was a one-man operation. Eventually, after a few years, I hired an associate to help me with administration and logistics. It was me and her working together, but it was essentially still a solopreneur.
In many years, probably the most difficult decision that I ever made and the most difficult change to ever make was to go from one primary person at the firm, me, to another one. In fact, I ended up bringing two partners in at the same time. We went from 1 to 3. Honestly, everything from that point on was much easier, but that first decision to try to take a risk and scale was daunting, difficult, and scary.
When you’re a solopreneur, you generate revenue, but you take all the cash as yours. You generate cash, you make sales, and it all goes to you. You pay some bills, but mostly it’s all your money. The decision to bring in partners meant that suddenly, I was going to be distributing a lot of cash to them, paying them as well, and I didn’t know if it would be successful.
For seven years, I was on my own teaching. We’re all creatures of necessity. It got to the point where the demand was so high, I was teaching so much that I had no choice. In the world of corporate training, people always use 100. One hundred is a key number. That’s often a number of days that a corporate trainer attempts to hit every year.
It doesn’t sound much, but hitting 100 days of training means you’re on average 2 days a week running a course. There’s a lot of travel, administration, and business development, so it’s a lot to hit 100 training days a year. I had a couple of days where I was doing 150 to 160 days a year and it’s very physical. I thought I was going to die.
I thought I had no choice and the only way I could keep it going was to try and bring in some partners, so I made the decision to try. That was the hardest part. When I brought them in, I found a couple of great guys. All my clients said, “That’s amazing, Ian. You need some more people to help and run courses, but you’re still going to run all of our courses forever, aren’t you?”
I said, “Of course, I will 100% always be your training person because it’s a very personal business.” Through a very deliberate and gradual process, I would bring them with me and I would teach courses. They would come with me, they would help, and then they would teach a little bit. After a while, the students and the clients said, “You guys are all great. Who’s coming next time?” We knew we had permission and they didn’t care. They just wanted to make sure that they were getting the right quality. That was it. From there, it became much easier to start adding more people and to start scaling up.
It’s a good segue to the next topic that I want to talk about, which is about attracting and keeping great employees. For a professional service firm like you, it’s highly critical. You have a business and your people and you know how. If you can keep your people, then you can grow. If you churn your people, then you basically are treading water. What is your secret of attracting great people and then keeping them?
As you said yourself, the lifeblood of any good service organization is the right people. Bringing them in, training them, recruiting them, treating them well. There are a few things I have done and I knew that would be difficult because there are not many people doing what we do. Put it in perspective. When we bring in experienced people to become a new trainer with us, it takes 1 to 2 years for us to fully train them so that they’re up to speed to teach any of our course.
It’s a long investment period. We don’t want to see them coming and going. These are some of the things I’ve done. By the way, our turnover has been extremely low. It has been very rare. We’ve lost a few people over the years. It’s come down to a few things. These are buzzwords that people hear all the time. I’ll share with you some of those buzzwords, but then I’ll tell you one tactic or technique I’ve used that has also worked.
The first thing is treating people as equals. Everybody I treat as equal, but certainly, those that are going to be fellow instructors and fellow principals, I treat them as equals. I try very hard not to micromanage. People have expectations around teaching courses at a certain date. They have to get themselves up to speed. Give people a long rope. Treat people with respect.Treat people as equals. Give them a long rope and treat them with respect. Click To Tweet
I’ve always been a big fan that you need to treat everybody extremely well. It doesn’t matter if it’s the person that collects the mail or the janitor. I try to speak to everyone, ask how they’re doing, and check in and find out how their family’s doing. People appreciate being spoken to and included as though they’re a key part of the team, like a family. That has gone a long way to keeping people happy. Being respectful, curious, and asking people about themselves have helped.
The second thing is including a lot of humor. We like to joke around. We work very hard. We teach finance to prominent firms all over the world, but we don’t like to get ahead of ourselves. We still like to have fun, have a good time, joke around, and be real. Nobody likes a big ego. There’s no ego on our team. We like to have fun and joke around, which is critical to our culture.
The third thing is for our partners and the principals that are teaching. It would be so hard to replace them and it takes a long time to train them. In order to keep them, if they were going to be teaching and helping to grow the business, they had to be rewarded for that. I made a decision early on that I would grant and give equity to all of our partners. They’re not buying it. They are given. It’s a very interesting type of equity, but they are granted and given it to motivate them to help build and create value for the company.
We are going to get into this in a minute, but I like the ideas that you share about attracting and keeping people. You said to treat them as equals, at least the principals. If you have juniors, they’re not your equals, but you can still treat them with respect. Make sure you take care of them, you check in with them, and you take an interest in their personal being. It’s what you said.
Give people a long leash. Don’t micromanage people. I love the humor piece. I find myself as well to lose maybe a little bit of attention on it, but it is important to keep things loose. Don’t take ourselves too seriously. Self-deprecating humor is good oil. Finally, you said to give and grant equity to partners, which is pretty unique.
Some people do it, but it’s not an obvious and easy thing. I did it myself. It worked well initially, then during the financial crisis, it didn’t work at all. I don’t want to get into it. What I’m curious about is how you do it, what is your special brand of equity grants, and how you then shared the control over the business.
As I mentioned, I believed early on that if I was going to bring in, a lot of entrepreneurs are scared to reduce their own equity stake. They want to stay at 100 and they’re afraid to dilute themselves below 100. A very small number of them are able to achieve growth, and they’re able to, but in a lot of cases, they can’t. I said to myself, “I would rather own a small percentage of a much bigger company than 100% of a company that’s not worth much.”I would rather own a small percentage of a much bigger company than 100% of a company that is not worth much. Click To Tweet
Last I checked, 100% times 0 is still 0. I thought that I’d be better off trying to own a smaller piece of a bigger pie. What did I do to make sure that would work? A few mechanisms. First of all, at some point, I knew that I could potentially be diluted below 50%. I had heard stories of people who diluted themselves below 50%, and then all the partners ganged up on them and kicked them out.
I put in place some mechanisms in our shareholder agreement that no matter what percentage I get to, I still have some veto rights over some pretty key critical decisions like acquisition, raising equity, or replacing me. There are certain things that I still need. There are things I can’t do all by myself, but the rest of the team can’t move forward on certain things unless I’m along with it. A critical veto capability was important.
The second thing is I wanted people to know that if they’re being given equity, it’s not forever. Meaning, in a small private company, equity is only worth something if one day you can sell it and somebody wants to buy it. If we’re building a firm together and then one day we can sell it together, then everyone will benefit.
If you choose to leave, it’s not like a public company where you’re granted public shares, you’ve got your stock as a reward for your work. You get that stock. If invested, you have it forever. It’s not like that. We have to keep building and working every single day. If someone leaves, their equity is lost. It flips, so it doesn’t disappear to zero. If it went to zero, that would negate any value that they had built. They might have been with us for ten years and left.
The mechanism is if someone leaves, their shares roll and flip into a class of preferred shares, and they get frozen. The value on the departure date is the highest that they would ever get. If they get frozen, let’s say, at $1,000. On the day they leave, they get frozen at $1,000 in a separate class from shares. One day down the road, if we ever sell the company, it doesn’t matter what they would’ve been worth on the sale date, the maximum they get is what we said they were worth on their departure date.
That is what we’ve done because that means we can now issue more equity to new partners. I never wanted to be in a situation where a lot of senior partners left holding most of the equity. You had a few juniors owning a little bit of equity. The company wouldn’t survive. That was why I put in place that mechanism.
It’s a very interesting topic because I’ve seen companies where there were two partners. One of them was generating all the business and all the connections and wanted to grow the business. The other one was looking at it as a lifestyle business, didn’t want to grow, didn’t want to work as hard, and didn’t control the relationship.
In fact, if the passive partner wanted to sell their stake, it would’ve been worse than if the active partner would’ve wanted to sell their stake. Anyone would’ve bought the passive stakes because there was a driver in the business left. It is totally unfair that the one who did all the work had a useless equity stake.
Sometimes things like that happen. It goes to show that in a small private company, value is not nearly as liquid and transparent as it is in a public stock where there’s a huge market of thousands of buyers and sellers. In a small company, the value can spike or collapse based on 1 or 2 people or customers coming or going. For sure, I can see that in passive partners getting a good deal. He wrote on the coattails of the active guy and it makes sense.
Let’s talk about your business. Let’s talk about the financial modeling spreadsheet. Why do you consider this one of the most important financial skills in the 21st century? Is it something that everyone should be able to build a spreadsheet model?
In the world of business, financial models have become the most important tools in the world of finance. Financial modeling has become one of, if not the most important skill for business professionals. Why is that? It’s because financial models have become the most important decision-making tool in pretty much all of business.
Every major decision that gets made these days in the world of finance, accounting, and business if done properly, is made on the back by referencing and using a financial model. Critical decisions are used in big companies, should they take on more financing? Should they take on more debt? Should they make an acquisition? Should they divest part of their business? Should they embark on a joint venture or a partnership? Should they grow the company?
Any critical major decision about the business should be based on the insights and results from a financial model. That’s why I say that it’s so critical. If you are working in a business environment, you either need to know how to build a model or how to read one, review one, and check one. You have to have juniors on your team that know how to do it because it’s going to be used religiously in so many critical decisions.
That’s not necessarily an easy thing. We did the financial modeling in my investment banking firm. Sometimes these models would be 30 to 40 pages long. You can still do a one-page model, but often the real intricacies could only be reflected in a more detailed model. What is the difference between these two, the simple model and the detailed one? What is the illusion of accuracy?
What is a model? First of all, when I talk about financial models used to make critical decisions, what is it? It’s simply a spreadsheet. The way most people in the world of corporate finance are using the term financial modeling, all we mean is you are building a forecast. All we’re doing is building a forecast usually of a company, but the forecast could also be of a division, a business line, or a project.
We are building a forecast of a company’s financial performance of their financial statements. Usually, forecasts are 5 to 10 years. That’s the most common length. It doesn’t have to be. Some are shorter. Some are longer. All we’re doing is building a forecast. We’re forecasting the income statement, cashflow statement, balance sheet, revenues, operating costs, and debt.
All the pieces, the various elements, and the numbers, we are forecasting, and then rolling that into an integrated five-year forecast on the financial statements. That’s what we’re doing. Given that’s what we’re doing is building a forecast, that’s because we use the forecast financial statements to make these critical decisions. What’s never standard in a financial forecast is the level of detail that gets used.
That comes down to the proficiency of the modeler himself or herself to decide the appropriate level of detail to be used in the spreadsheet. Think of your spreadsheet. Let’s say I was modeling a company that had 300 employees and I was trying to forecast labor expenses for the full year. What would the labor expense be? I have multiple ways I could do that, but there are two extremes.
The simplest way I could forecast labor expenses is by looking at the total labor expense last year. Let’s say it was $10 million. I could say, “Let’s assume that we’re not going to grow much and that the labor expense will grow by 3% and it’ll be $10.3 million.” I could have one-line item, then take labor expense last year, and grow it by 3%. That’s one extreme.
The other extreme is if I have 300 people, I could have every single person at the company in their own row on the spreadsheet. I could list the CEO. Let’s say CEO is Steve. I could have Steve’s salary in one run. In the next row, I could have Ian. Let’s say I’m the CFO, and I have Ian’s salary. I could list all 300 employees in 300 rows, their salaries, and benefits.
I could forecast each person’s salary into the future, and I would’ve 300 rows. I could arrive at the total labor cost by doing it in 1 row or 300. If you have 5,000 employees, it would be 5,000 rows. You get the idea. The goal of a good modeler is to say, “What’s the appropriate level of detail for me to make an optimal decision? Do I need to have all 300 employees listed in the spreadsheet? Does that help? Does it make me make a better decision?”
If not, that’s what I would refer to as an illusion of accuracy. Having 300 rows in a spreadsheet just because you have the data, doesn’t mean you’re going to make a better decision. If those 300 rows add up to $10.3 million and I had the same number in one row, I might make more mistakes that way. People often have excessive detail in spreadsheets, which leads to this illusion of accuracy. You got all this detail, but it doesn’t mean it’s any more insightful at giving you a better direction and answer.People often have excessive detail in spreadsheets, which leads to this illusion of accuracy. You got all this detail, but that doesn't mean it's any more insightful at giving you a better direction or a better answer. Click To Tweet
The more detail you have, the more risk of error you have. With the financial model, it’s a very risky business. I remember when we were doing it in my firm. Finally, I let go of financial modeling and delegated to my colleagues. What I kept doing for a while is looking at charts. I asked them to make charts of all the financial statements.
I was looking at any jumps in the charts so that I can look at the details and understand the big picture. I kept increasing the distance between the details and the big picture. Eventually, I said, “These guys got it.” The illusion of accuracy is real. Some time, I was into this detailed modeling. These days, I just go to the whiteboard and say, “What’s going to be our revenue? What’s going to be our gross profit?” We talk about margins. What can be our overhead?
Doing a simple back-of-the-envelope calculation can be very powerful because people get it right. They’ll start thinking about, “There is a breakeven point here. What are the scalable expenses? What is our overhead? What do we do with these lines on the financial statements?” I’d like to ask before we wrap up here. In the last years since I’ve been out of modeling and kept my distance from it, what has happened? Is this a static field other than Excel becoming more sophisticated? Are there things happening or it’s pretty much the same as it was?
Both. It’s dynamic and somewhat static at the same time, which is nice. It’s changing, but it’s not changing so fast that you become a dinosaur. Can you remember any public companies you looked at when you were a banker many years ago?
My business was in Hungary. We looked at MOL, it was one of the public companies, an oil and gas company. Egis was a big pharmaceutical. There was OTP, a big bank.
Is it still public?
OTP is. MOL is. I don’t know about Egis.
Let’s say we’re looking at ExxonMobil in the United States. If you looked at Exxon’s or MOL’s financial statements in 2022, and then you pulled up the financial statements from 20 years ago or 30 years ago, they’re going to look almost exactly the same. There will be different disclosure. Disclosure rules have changed, of course.
Now, companies have to provide more disclosure, but the way the income statement is laid out is the same. They still have revenues, operating costs, depreciation expenses, and interest. The balance sheet has the same line items on it. In modeling, we’re forecasting a company’s financial statements. The discipline of accounting has not changed that much.
If you look at Walmart’s financial statements, their 10-K, or annual report in 2022 or many years ago, it looks the same. The SEC filing hasn’t changed. Our job as modelers is to forecast based on looking at the most recent actuals. The accounting and the actuals haven’t changed radically. The forecasting has not changed radically. Now, companies have to report operating leases on their balance sheet.
There are some accounting changes but not millions. There are a few changes. In that way, modeling is not a whole lot different now because we’re still starting with the historical financials. The rules around accounting are a little different, but not radically. The 10-Ks look similar. Where has it changed? As you mentioned, technology has improved.
Models can be much bigger these days. Back in our days when you and I were younger, you couldn’t make your spreadsheet too many rows because then it would crash. It would be too big. Now, models can be huge. Spreadsheets back in our day used to have 65,000 rows, which is a lot, but not massive. Now, a spreadsheet has 1 million rows and it works faster.
There are a bunch of features and additional technological skills in Excel that allow us to have more flexibility and capability, but it’s incremental. I would not say it’s earth-shatteringly different. It’s incremental change. Putting visualization on top of models to build beautiful graphs, charts, and visualization outputs is newer and nice. By and large, if you could model many years ago, it’s not radical. You could still pick it up very quickly again now.
That’s very reassuring. I’m glad I didn’t lose all my expertise yet. You are in the business with the Financial Modeling Institute obviously to do certifications. If people want to become proficient in modeling or want to be an expert, you’ve got different certifications. What are the benefits of obtaining a certification?
There has become a heightened expectation around rigor and discipline of strong analysis because of a bunch of financial crises over the last 10 to 15 years. CEOs and CFOs do not want to be caught off guard by an analysis that’s uncertain and not working well. Everyone is looking for higher-quality analysis because they don’t want to get in trouble.
They need people who can build these analyses and make sure they’re right and that they’re not having filled with all sorts of errors and problems. Organizations are looking for people who have strong modeling skills. The only way to prove it would be to have an independent accreditation that says you have excellent modeling skills.
Before the FMI was around, there was no way in the world to prove it. Now, the FMI is the only way to independently prove it. There are a bunch of training firms. You can buy their courses and they’ll give you a badge. Those badges are always completion badges. There’s nothing rigorous. The FMI is the only organization where you have to sit a four-hour proctored and exam, build a financial model from scratch with no resources and no internet.
Our graders grade it manually. If you can pass that, we can prove and validate to the whole world that you have excellent modeling skills and you can build a forecast of a company. That’s our Level 1 AFM program, the Advanced Financial Modeler. That’s the only way to do it. This is needed because employers are looking for it, and this helps them know.
I almost feel the urge to enroll in one of your courses, but then again, I don’t have time for that.
You let me know. We’ll get you in there anytime. I want to see you bolster your modeling skills again.
I was originally attracted to investment banking because I thought modeling was so fascinating. Being able to value the company, look at the future cash flows, and scan everything back looks like magic. Anyway, thank you for your information. I recommend financial modeling. I still run my own cashflow statement, so I see nine months ahead in my own cash flow. I have no surprises unless I get an unexpected bill from an unexpected government institution.
I pretty much know what I’m looking at. If I’m going into the red, I know well in advance that I have to work harder to make sure things go back into black so I recommend it. If people would like to get certified, or they would like to learn more about the services that FMI and The Marquee Group are providing, or they want to talk to you, where should they go? Where can they find you?
I’m active on LinkedIn, Ian Schnoor. I’m easy to find on LinkedIn. I’ve been putting out videos and a video series on things like why your balance sheet doesn’t balance. You can check my LinkedIn page and look for videos that are free there. You can easily find me as well by email. You can find the Financial Modeling Institute, it’s FMInstitute.com. Check out our programs. Our level-one accreditation is what I described. It’s the Advanced Financial Modeler or AFM, the four-hour rigorous exam. I wouldn’t even worry about the ones higher than that at this point. That’s the first one.
We also now have an early entry program called our Foundations program, which might be appropriate for some people. It’s much gentler. It does not prove you have strong modeling skills, but it shows that you’re attaining an interest. You’re building your skillset. It’s called FMI Foundations. These are all things you can find on our website. We have learning materials and twelve hours of videos to show people the way to build these modeling tools. That’s our focus at the FMI.
The Marquee Group is a traditional training business. We have a wide range of courses, some self-study, and some live. It’s TheMarqueeGroup.com. You’re welcome to check those out. You can get a participation badge when you’re done. We don’t look to provide rigorous testing, but it’s great content that you’re welcome to check out. That’s how you can find me. I hope to be in touch with some of your audience.
Thank you, Ian Schnoor, the Executive Director of the FMI, Financial Modeling Institute, and the Founder and President of The Marquee Group. If you’d like a custom business operating system for your business that will take it to the next level, to the top of the mountain, then check out my website StevePreda.com. Ian, thanks for coming on the show. It was excellent to walk down memory lane and talk a little bit about financial modeling. I hope our audience enjoyed it as much as I did.
Thank you for having me. It’s a real pleasure to be here. I look forward to being in touch.