Maximizing Your Business’ Value
We’re doing a continuation of the series with my co-host, Marla DiCarlo. She’s the CEO and Cofounder of Raincatcher, a business brokerage out of Denver, Colorado. Returning as guests, we have Allen Harvey and Jim Gilbert. In the previous episode, they were going through the details of the sale of a business that they ran together in Denver. Marla’s company handled that transaction. What I wanted to cover with Jim and Allen with Marla’s help is to unpack the skillsets that both of these gentlemen bring to the table and their insights into the business owner's mindset and skillsets. Some of the levers and tools that they can have in place will help them run their business. We talked about this a lot before we started. We’ll start off alphabetically. Allen, if you would tell us a little bit about your business and who you serve?
I’m an independent valuation expert. I do professional certified business appraisals. We also work on calculations, which are not independent certified business appraisals. I work for IBVA and IBVA Pros is the team that we put together with some other evaluation experts. I’m teaming with a valuation expert by the name of Mike Dougan, who is a veteran appraiser in the industry We are also developing some relationships and teams with other appraisers as well. We have a team approach to our appraisal practice. That’s what I do. We are at IBVA.com or IBVAPros.com.
I’m a CPA. I run a CPA consulting practice. We have three sides to our business. One side is the traditional accounting bookkeeping day-to-day, with Cloud-based accounting. I’ve got the business side where I work on lots of CFO, controller, advisory business, and then the other side of our business, which is my passion is technology. How do you apply technology? I spend a lot of time working with my greatest love is merger and acquisition. I spend a lot of time helping my owners, both buyer and seller, be successful and how to implement processes and achieve maximum value on whether you’re buying or selling.
Marla, you and I are friends. We’ve talked a lot and we’ve had a number of episodes. Talk a little bit about what you do at Raincatcher and then we’ll try to weave together while we’re all on this show together.
At Raincatcher, we help entrepreneurs to sell their companies and more importantly, to maximize the full value before they sell. That’s something we see owners are either aware that they’re leaving money on the table or that they have options before they decide to sell their company. We’re here because Jim and Allen are a big part of the affiliates that we use to help those owners make sure that they don’t have seller’s remorse, maximize value.
Thank you for that. That’s exactly why you’re here. I think about the business owner and for many of them, it’s their life’s work. They’re extremely passionate. They know everything about that particular service or product that they have. I think what they fail to do, or in many cases difficult to do is view their business from the buyer’s perspective. There’s the difference that we talked about previously between a job and a business, value drivers in the business, all of these various topics. Thinking about how do we start. What we wanted to do is goals out of here is to share with the business owner 2 or 3 things may be that they can take away from this episode, that they could deploy in their business that will bring profits to the bottom line or increase the value as opposed to cashflow. Who wants to start, Allen, Jim?
You’re spot on there, Bob. What the readers here need to understand is if you’re confused by, where do I start? What’s my company worth? Where am I at in the process? Do I sell now? Do I sell 5 years from now, 2 years from now? There are people out there I’d recommend that find advisers. If you’re a manufacturer and you’re great at manufacturing, there’s also the art of business and getting people or surrounding yourself with people that are great advisors, have great networks, have connections to all facets of the business. How do we look at that? How would a buyer look at me? What are the things that are attractive to a buyer? Having somebody that can advise you and work through what I call a three-legged stool. It’s people. It’s process and systems. How do you look at all three of those? All three of these need to be synergistically connected. They relatively need to be equal. What are the things that people need to look at? That’s a super important aspect and we want to try to impart some of our knowledge and give people a couple of steps to think about. What are the steps forward making that assessment? What does a buyer think of my business?
I’d say from a valuation perspective, an independent certified valuation would say, “This is what we believe the business is worth.” We all know that a business is worth what a willing buyer is willing to pay for it. A willing seller is willing to sell at an arms-length transaction. There are things that a business owner can focus on. There are things that are outside his control from a valuation perspective. There are drivers that are exogenously determined. They’re coming from the outside. We have no control over them. We don’t have any control over the macroeconomy, the micro economy. We don’t have any control over COVID-19 and its economic impacts. The things we do have control over or how we run our business, the way our financials are put together in the quality of the financials and profitability. Many business owners focus on EBITDA. EBITDA is an important factor, so is free cashflow and a strong balance sheet. There are a lot of things to be looking at from a valuation perspective.
Marla, for you on your perspective, these guys are business owners that have sold. They went through the process and where you were unique as you started your business with exit in mind. Many business owners start their business with the hope of staying in business in mind and then building the business. Marla, with their perspectives and yours, any thoughts?
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What’s important is, first off, I feel many business owners wait too long to get that first valuation. I don’t mean to make this sound like they’re doing something wrong because I don’t think they understand the process or the need to have a valuation earlier in your business. One of the first things is getting a valuation, which is different than the back of the envelope valuation. There are different types of valuations. A certified valuation is done by Allen, who is certified to be able to do that and then have a benchmark. You know where you’re at so that you have something you’re working towards. You bring in someone like Jim to help you with that strategic roadmap on how you’re going to grow your business, scale your business the right way. That was something that Jim and Allen both did from day one with their business that we worked with them to sell back in 2019.
That was what was incredibly impressive about their business. It stood out from hundreds of businesses that we see. Jim and Allen probably don’t know this, but Jason and I talk about their business with our internal team often. That’s why we’re here. We want business owners to do this. From day one, they had the mindset of, “We are going to do the right things from the beginning around people, process and systems to set our business up for success.” They did that when they had a life event that triggered them needing to sell, they were still able to control that sales process. That’s my pitch on why I’m here and why I’m representing working with Jim and Allen because of the importance around that. That’s how a buyer looks at a business.
Allen, I have a question for you. Let’s say we have the same business, same industry across the United States. Nuts and bolts maker, would there be a bell curve on the valuations of those businesses? If you had from California to New York, do they all basically solve for the same multiples? Are there variables that you observe?
There are many variables. There’s a geographical location. There are local economies, different tax rates. What a business is selling for in California is not going to be the same as what it’s selling for in Montana, all things being equal. There is a lot of variabilities. I’d say that as Marla pointed out, getting a benchmark for one’s business is an important thing to do. It does create that starting point. You can measure anything that doesn’t get measured that you can achieve and you can measure your success going forward.
What I was thinking of is you’ve got some with lots of skillsets in there at the far right-hand side, the better side of the bell curve and the people that don’t have the policies, procedures, and all that in place are on the lower end of the bell curve, which brings me to you Jim. You’ve got similar industries and businesses. You look at Allen’s valuation for the business and you go, “There are that blue thing, red thing and green thing” that’s obvious to you that may not be obvious to the business owner. If you’re looking at one of Allen’s valuations of a business and a guy goes, “I know I’m going to be exiting in X number of years.” What types of things might you look at from a valuation that’s done to start trying to develop a plan to move them to the right-hand side of the bell curve?
There are multiple ways to look at the value of a company that Allen will get into. My favorite methodology, discounted cashflow, and how much cash does this business produce? Buyers want to have free cashflow so they can get a return on investment. That’s probably the first thing I look at is what is the free cashflow of the business is? Looking at EBITDA. EBITDA is another factor. EBITDA is a large driver. People need to focus on that. Some people look at a business and say, “It’s a multiple of EBITDA and that’s what I’m going to pay for it.” How much equity do I have on a balance sheet? I always tease my clients that’s their number one scorecard. What’s the equity on my balance sheet? How much have I retained over the years? That’s another thing we look at.
When looking at market comparables, I always say, “There’s a reason why there are market comparables. It shows values and what people are paying historically” Sellers are always saying, “Why would X company get more than I would?” It’s an eternal focus on what drives value. It’s all about the maximum value of people, processes and systems. A buyer wants to come in and say, “I don’t want to have to pay any more than I have to because if I’ve got great people, great process and great systems, I’ve got something to work with. I have to get return on investment. I have to get there. I’ve got to get a company that gives me free cashflow, gives me profitability.” That’s what people are working on. If I’m going to advise my clients, I’m talking about those things first, that’s the macro level before we start getting into the weeds.
Allen, on the appraisals, most of the world is familiar with the real estate appraisal. Your cops in your neighborhood are X and your house is worth whatever. For you and for the business owner, what types of appraisals should they be thinking about and what are the functions of those appraisals?
For the business, oftentimes what happens is if the business owns real estate, you want to disaggregate those. You look at the real estate separately. Real estate is held separately and the operating company is held separately as entities. We would presuppose that’s the case for a business. Real estate appraisals are heavily based on comps. There is a capitalization record method that real estate appraisals will sometimes use and for commercial retail space and whatnot. On the business side, it’s a bit more in-depth. We are governed by certain rules with revenue rulings from the IRS. We’re governed by used app standards. We’re also governed by professional associations like NAPFA, ASA and ISBA.
Maximizing Business Value: Business owners oftentimes don’t understand how much work goes into giving a proper valuation.
These are the organizations that govern our industry. They are the ones that create the standards that we have to abide by. There are three approaches to the value. It’s the main asset approach, income approach and a market approach. What Jim was mentioning a moment ago on those comps, that’s a market approach. You’re comparing yourself to other companies in the market, other transactions that have occurred sometimes as a public market where you’d have to make certain adjustments for a privately held company. Sometimes they’re private transactions. The income approach is what Jim was referring to when he was talking about the discounted cashflow method.
That it, for many purposes, is the preferred method of valuation. It’s a method that the courts have oftentimes gravitated towards in certain cases, not in marital disillusion, those are typically an excess of earning type method, which is an X asset method. Those are the approaches and each approach has methods underneath it. Each one of them has to be looked at. We’re required by our professional standards to look at each of those approaches and make some professional judgments of which approach to go with or to wait for those approaches.
Marla, you have a business owner that reaches out to Raincatcher and says, “We’d like to engage you to market our company. I have this appraisal.” You go, “This is what my company is worth.” For you, as you looked through, I get an appraisal for a piece of real estate and like you guys said, “Yeah, that’s nice.” It will sell for what somebody will pay for it, not what it’s appraised for necessarily. For you, how do you view or use a certified appraisal when you’re talking to a business owner?
It makes our job easier as a broker, if we have a certified valuation versus an opinion of value. Buyers are more inclined to accept a certified valuation. There are many different methodologies for valuing a business. Depending on the geographic location, the industry, the size of the business, they’re all factors that influence the valuation. It makes our job a lot easier when we have somebody like Allen, that’s endorsed. This is what the business is worth. I had a question that I wanted to ask Allen. I bet this is a question that other owners are wondering. We already know that there are different ways to value a business. We talked about the rule of thumb, using the income approach. Is there anything that helps you to put together that valuation? Anything the business owner can put together ahead of time that would help you to have a more reliable valuation to present to them.
First and foremost is a good, solid set of books that makes sense.
We all laughed when you said that because sometimes where it’s like, “I understand that you didn’t know what you didn’t know. We need to set you up with a bookkeeper. Jim.”
A lot of our job is making sense of those books in what we call root casting them. We recast the financials to try to make them relevant to what we’re doing, but also to make them coherent. Sometimes there are many missing pieces. The typical PBC are provided by client lists comes with a set of financials. We try to go back five years if they got the balance sheet, income statement, certainly statement of cashflows, if they’ve got it. Governing documents, we need articles, bylaws and management operating agreements, partnership agreements, buy-sell agreements, those kinds of things. That gets us started. A lot of us getting into a process. I don’t want to get into the weeds too much, but we were always relying on not only those documents and income tax returns, but we are relying on the management interview. When we go to management and we ask them questions about their business, what’s going on in the future, and what assumptions do you have? That’s a big piece of it. We have to gauge that and make sure it passes the sniff test. It’s reasonable.
That’s important because businessowners oftentimes don’t understand how much work goes into giving a proper valuation. It’s common. Both of you have seen this, Bob, I’m sure you’ve seen this too of tax returns, not even close to the financials that they presented. Usually, there’s an explanation and sometimes it’s that the CPA hasn’t made their adjusting entries. There’s a lot of work that goes into having that conversation with the owner to get it right. They could pay for valuation that you’re delivering it to them going, “We will base upon what you’ve told me, this is what I have.” They have to participate in the process.
Participation in the process can get hairy sometimes depending on what the circumstances are. We do valuations for solutions, for litigation purposes and for shareholder disputes. In those cases, everybody’s got an agenda. In some cases, maybe a husband who owns a business and the wife is trying to get the valuation done for marital dissolution. We’re not always getting cooperation on all sides to get all the accurate information. We’re not auditors. We don’t audit the books. We’re not making any assumptions or making any comments about whether they’re debt compliant, what the state of the financials are and the information we’re getting. We do use professional judgment to assess whether what we’re being told is reasonable or not.
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Marla, do you think the people selling their businesses understand that there’s more than one type of buyer?
No, I don’t. That’s where it’s important for the business broker that they’re working with to explain that to them. I don’t think most of them are going to understand the process in general because they’ve never done it before. That valuation plays a big part in the type of buyer and attracting multiple buyers and all the above.
You’ve got the financial buyer. You’ve got the strategic buyer. What struck me as you guys were talking from the previous episode where we were talking about the procedures. All I could think about when you’re talking about your companies, they can scale that. They can apply that process to their other company. They can bring all the stuff that you did extremely well and putting the company together. It would seem like to me a strategic buyer would view that differently than perhaps a financial buyer.
Jim can add to this, my experience even as an accountant and coming from the perspective of a buyer that there are different ways that I’m going to look at one business versus the other business. There is an overall general rule of thumb on the drivers that you’re looking at. I’m probably not going to buy a business that isn’t going to grow or it isn’t completely owner-dependent. There’s a general rule of thumb across all fire types. Don’t you, Jim?
Yes, there is. Financial buyers, strategic buyers, that’s two different ways of looking at things. It depends on what you’re trying to do. If there are buyers that are looking for value, looking for a value that they’ll bring in their own people processing systems. I see that a lot. I’ve got some clients that’s all they want to do. They’re looking for something that’s a low value that they can take and run with and bring it into the fold with a group of companies like in construction. There are others that want to come in and buy a company that is ready to go. They want to be on the board of directors or they want to work on the business instead of in the business.
They want the company to run itself. That’s advantageous for a seller. If you’ve got a business that has people, processes and systems ready to go, that can attract some premium value. There are other ways to do it. If you look at a PE company, a lot of PE companies want to buy companies that don’t care what you’ve got. They’re rolling into their system and give you your accounting system, your leadership, your board, and those kind of things. That’s a totally different sell for a buyer. You have to be careful about who’s your audience. What buyer am I going to sell to? That’s a critical point for our sellers. What buyer do I want to sell to? Figure out who you want to sell to and then go after it. That’s critical as well.
As we talk about this for the business owner that’s tuning in, my thoughts on the sequence, how do I figure out what my business is worth? You look at it and they go, “It’s worth X.” You go, “Can I move it from this side of the bell curve to that side?” If so, Jim, what are the levers I can pull? Allen, you can comment since other businesses like yours look like this. If you can move these following value drivers, you’ll get over here where maybe you go from a C company to a B company and bringing in the coaches to make that happen. For a lot of business owners, there’s a concern that the coach is not an investment. I don’t think they see the return on investment for bringing those value drivers forward at the end of the day. Can you comment on what you see from a company that goes, “I’m going to sell here or I’m going to bring coaches in and I’m going to start working on my value drivers?” What’s your experience?
Allen and I worked in many businesses, where we have done some consulting with an owner(s). Typically, they never really look at pricing, and processes. They don’t care so much about systems. They often have a bunch of disparate systems. The employees are unorganized, scattered. The first thing we look at is pricing. Within about short period, we often realize that they are leaving several hundred thousand dollars on the table with clients. Sellers often have not raised prices in years. They haven’t negotiated contracts that are fair. Right then and there, whatever we charged or whatever I charged them, was nothing in comparison to the findings. I was like, “There is some money right there.” In every phase of every business, there are little nuggets that you can look at to say, “How can I get better?”
If you have an advisor that’s willing to look a little bit deeper than simply saying, “You need to use this system, then this provides objectivity.” If the person understands your business, understands your end game, your goals and understands business and how to look at any business, look at the management staff, this is optimal. If a company is owner dependent and talks about this at nauseum all the time, we got to make a change to that because you potentially could lose money and money on the table. How do we do that? Do we have a management team that’s ready to go and could be developed? Is it a 1 or 2-year path? Do we need to have strategic hires?
Maximizing Business Value: The number one thing that 99% of business owners don’t even look at is their balance sheet.
With some of my clients, we buy external companies that have strategically placed management personnel that we bring into the company to put in strategic positions in the company to get away from owner dependence. Get a staff that’s organized that follows a strategic plan. Those are examples of what some of the things that Allen and I were doing. Daily, I always have the lens of the buyer all the time. I’m always thinking about that. To have an advisor that will be motivational, and can be frank with you and say, “In this area, we’ve got a problem. Here are three alternatives.” They all have three different timelines. They have three different costs and we need to determine what’s best for this company. No two solutions are the same or can be applied across all companies. Those are some examples of the help that people need.
Jim, if you were to pick one area that a business owner should start with, what would that be? Where can they start?
I shouldn’t say this because I’m an accountant. The first thing is, that goes hand in hand, financial statements and KPIs. What are my metrics? A lot of people have poor balance sheets, which creates doubt for the buyer. When I go represent a buyer, the first thing I look at is the balance sheet. If the balance sheet is squared away and I can get a cash rec or I can look at the equity, there are no upside-down balances this is something to consider and work with. Get your financial statements in good order. As an owner, you need to know your financial statements. It’s no different than when Allen and I were working with Marla on our business transaction. She asked, what are your metrics? What are your drivers? What are the variable costs? What are the fixed costs? What’s my breakeven point. What are the basic block and tackle things that people need to know?
I would start there because that’s the big lift usually. I would say 9 out of 10 companies struggle in those two areas a lot. I probably look at 200, 300 transactions a year and I would say 90% of them have some issues. I always go back to the buyer and say, “It looks like their balance sheet is in trouble. Did they ever have an audit? Do they have a review?” A lot of times, owners don’t want to pay for audits or reviews. If I can get a reviewed statement at least or get an audit of some type, or at times a quality of earnings review, this helps a great deal. Sellers should consider paying for these. I’m telling you the quality of the earnings review, the lenders love that.
Every lender I go to that we’re getting an SBA loan or whatever type of loan, they always want to quality of earnings review. I get those owners who say, I’m going to pay $10,000 for a review? The audits and quality of earnings reports tells your buyer, tells your banker, tells all your partners that somebody independent of you looked at your financial statements and you’re ready to go. Financial statements are ready to be presented according to GAAP. I know you Marla, I bet you struggle with that trying to get that basic financials and how do we project out? How do you tell the story financially if your financials are erratic year over year?
Allen, as they’re talking about these steps, when you come in to look at a company, what access do you have to these types of documents, quality of earnings review, reviewed financial statements? Do you see those or request those?
Rarely do we get everything we ask for. That’s the nature of the business. We asked her that we asked for that. We asked for financials very important. As Jim alluded to the balance sheet, that’s something that a lot of business owners ignore. People focus on the P&L, but the real scorecard of a company is execution.
The number one thing that 99% of owners don’t even look at is their balance sheet. That’s where they get in trouble. Their profit-loss statement could be letter-perfect. It creates that doubt. If somebody hires me as a buyer and I’m doing due diligence, remember, Bob, I’m going to look at your balance sheet because that tells me what your accounting group’s been doing, how you’ve been carrying yourself financially. I start ask the questions. I go through the balance sheet because for a buyer, if I’ve got a squishy balance sheet that I don’t trust, I might move on to another deal, which means that deal’s not as important to my buyer as maybe another one. When I see a good set of financial statements, I’m intrigued by that. I’m like, “We’ve got something good here. Maybe we can rely on it.” What’s the thing both people are trying to get to the end. We’re trying to trust the financials. What the five-year projection free cashflow, the whole nine yards? Pay attention to your balance sheet.
Your balance sheet should be reconciled. Everything should be reconciled. The owner wouldn’t know that a lot of times, why would they? That was something that they used to bring up. “I didn’t know that. I’ve never taken an accounting course,” but your bookkeeper, your accountant or your CPA should. I agree with you. I’ve seen buyers to your point, Jim, walk away from the deal because the financial states were in disarray. They didn’t trust them. They thought, “What else is wrong?”
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For a buyer, I looked at the balance sheet and they had many upside-down balances. I try to do a proof of cash. If I can prove out cash and I can get the 1231 bank rec to reconcile, I might keep looking. I don’t go beyond that. How many years has this been wrong? Especially at a legacy company it’s been around 30 years and the guy or gal never looked at their balance sheets. I didn’t know I had these issues. Nothing’s reconciled.
Allen, when you’re doing a valuation, do you often find that the business owner protects or understands the value of the intellectual property that they develop in their company?
No, they don’t. We try to have a discussion about tangible assets and intangible assets. From the investment world, we call that alpha. It would be any excess beyond what the tangible assets or reasonable rate of return for a tangible asset would be. That is something that is part of the evaluation process is identifying those things and getting the balance sheet recast.
For the businessowner, let’s say that you have a particular niche or you have a particular insight or something that your company is special, especially design. They’ve got something going on. It’s their special sauce. For the business owner that has special sauce, but hasn’t done anything to protect their special sauce. What types of things can you do to protect or develop your intellectual property that would affect a valuation if you came to their front door to do one?
From a valuation perspective, we look at it as tangible and intangible assets. We prove out both types through the normal due diligence processes that we have. As far as protecting, IP, there are ways to go about that. Jim, you may have run across that. Share your thoughts on it.
I was hired several years ago to sell a company that had lots of intellectual property, a lot of state of art technology that the large government and military providers really wanted. For my first year there to help represent the seller, we looked at agreements with clients, agreement with vendors, employment agreements. We looked at patents, looked at trademarks. We tried to understand what we had in IP and how quantify what this. A lot of people do for this for tax purposes as well. Often, I see people overlook preparing an R&D tax study. Sellers get the tax benefit of that, but they don’t even realize what they’ve got. You spend all that time developing a report to support the IRS R&D tax credit. There are many ways to look at IP and I was providing a few examples.
Quantify what you’ve got because a prospective buyer is going to want to know what that is. How do you differentiate yourself from everybody else that’s doing the same thing? How does that make you competitive in the marketplace? Why do I want to buy that? What value does that? It may be an intangible value. In an asset deal, you’re looking at assets. You’re looking at intangibles. As a seller, I want to get maximum intangible value, I can get it for tax purposes. Lots of other reasons. I’m trying to drive that up because I want the buyer to understand here’s what you’re getting. Here’s my secret sauce. Sellers should know that It means something in the marketplace. Sellers need to know their marketplace, understand the delivery aspects, all those kinds of things.
The two of you, how often do you see trademarks or service marks? Would you say 50%, 20%?
My experience is not that much. Most people forget it. Most people don’t even understand. It’s funny when I’m on the buying side, as soon as we get that, the first thing we do is we protect our intellectual property. We do all the things that we’re supposed to do. It may be a patent. It may be a trademark. It may be copyright. It may be whatever it is. We paid for that. We want to protect that from everybody else, from our competitors to anybody else, because that’s what we bought. That’s the value we bought.
Maximizing Business Value: Quantify what you’ve got because a prospective buyer is going to want to know what that is.
They build their brand and they don’t protect it. Allen, If I’m the business owner and I said, “I need to understand where my business is. I’m going to be trying to exit my business in eight years.” That’s a good number. “I need to understand where I’m at and then I need to take and be able to look at the report that you prepare for me, understand where my deficiencies are, so I can go toward the target that allows me to retire.” What type of report would I ask from you? Once I did that, got it and you and I sit down together, is it reasonable for me to expect you to go, “Bob, there’s that blue thing over there that’s missing. There’s this red thing over here that needs something else.” Is that something I should expect from you if I engage you to do that?
Yes. When you receive a valuation report and there are different types. That’s part of your question. For internal ownership, transition or exit planning, they get a summary level report, which is an unambiguous, unbiased opinion of value that takes all the requirements and puts all the required methodologies into that report. It’d be different than a calculation where you basically are putting it into a computer program and spitting out a number, usually a DCF. That is an important report to get because it does give you a true sense of value. Like Marla, for instance, in Raincatcher, they will produce a calculated value. I don’t mean to speak for you, Marla. You come up with a calculated value, which is an estimated value. It’s not a certified appraisal.
One of the products that Raincatcher uses is a product called Value Builder. You’re referring to those blue levers, red levers and whatnot. That’s a useful tool that Raincatcher provides that helps the businessowner understand what levers he can be pulling or pushing, or what have you. The obvious one is financial performance. Everybody focuses on financial performance, but you also have to look at a lot of these other areas such as growth potential. How much concentration you have from your income, from a single client or a single group of clients? How much spread you have, monopoly control, the ability for the organization to run without you? That’s an important lever as well and customer satisfaction. All those play into it and can help you get from the left side of the bell curve over to the right side of the bell curve.
From the business, I was thinking of a tool. It’s like in almost any other school, you go, “Bob, you’re in the part of the class that made the top half possible.” You go, “I want to be to the top half of the class, how do I get there? Here’s my grade.” I’m looking not at what you bring to the table as I’m going to sell here is, as a diagnostic tool started doing discovery and you go, “If I don’t have my team built, how do I start to build my team fractional CFO to start with? I don’t have one. What are the things I can do? I’ve got a cashflow problem.” Which given the pandemic issues that we have, if that’s not the first thing on their mind is probably the second thing. I think about for the companies that experienced cashflow problems, Jim said, “I had a great business. I’ve got a cashflow problem. I can endure it, but I need some help.” What types of things might you consider and recommend when you work with the company that’s concerned?
Looking at the ability to forecast cash, looking at the ability for someone to look at the financials, projections, look at the alignment with the strategic plan. Some people have those people in place, most do not. I often say if you’ll allow me to come into your company and I’ll do the fractional CFO stuff and I’ll come alongside the owners and the management team and get them to think about sustainability. Where are we at and where are our metrics? Let’s do some comparisons of last month to this month, those kinds of things, and try to understand the business so we can make decisions. With informed data and informed decision points, you can make those decisions. What are the alternatives? For a strategic advisor, you need somebody that can give you alternatives.
It’s not one alternative. Look at the business, understand the business and say, “What if we pivoted it to this or did this, or did this?” In the COVID world, we’ve got some companies that are downsizing people, but they’re staying the course on what their delivery points are. There are people, processes, and systems. When revenue picks back up, it’s scalable, Bob. We go back up to where we were. We start adding people. We start producing cash. You want a business that can go down a little bit and expand and a business that’s not driven on 1 or 2 things to make the business go. If you lose a strategic client, for example, that’s the worst one. It can hurt you badly. Trying to get recurring revenue. That’s one of the things that a lot of buyers like to get, recurring revenues. Find ways to get sustainable revenue that cannot be canceled and terminated at a whim.
The length of contract, the durability of contract or, Marla, lease issues on the sale of a business. The business owner may say, “I have all of my contracts and they’re coming due next year. They’re trying to sell.” “Might consider that,” and the buyer is going to ask, “Those are all coming due next year.” Might that’d be something to take an approach and consider? If you’re a business owner and you’re considering selling at some point, look at your lease agreements. “Find somebody that knows what to do with that lease contract from a buyer’s eyes.”
Marla, if I could, one of the top five deal-breakers is an assignment of contracts, novation. You must know this, because the buyer’s going to ask in the first part of due diligence if your lease contract assignable? Your client contracts, your employment contracts, are they all assignable? If you can’t assign those things or they cannot be novated, it could kill your deal. I always tell my potential sellers, “Monitor those things, get an attorney,” I’ve got plenty of attorneys that will look at your contracts. Make a checklist, have them ready to go. What are my termination dates? All those kinds of things. That’s super important.
The thing that strikes me is as we sit here, I’m an armchair observer. I know enough to be modestly dangerous. I’m a business owner. I’m an exit planning advisor and whatnot, but I don’t do what you do. I know enough to ask the questions and I think many of the business owners, we talk about it regularly. They don’t know what they don’t know and it’s not that they’re bad people. They’re smart people. I admire them a lot. You look at that and the statistic on business owner transition is grim. It’s something like 80% of the businesses that come to market won’t transact. I think about the transition of what is it since 2008, two-thirds of all jobs created were created by small business.
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If those businesses won’t transition or stick around, what’s going to happen to the job creation since 2008? It’s a grim statistic to contemplate. Part of the reason we do these shows is to try to educate the business audience that’s interested. Can we give them a tool? Can we give them insight? Can we give them a go-to? Marla’s got a great company in helping business owners sell. Jim, you and Allen are former business partners, successfully sold a business, have successfully run businesses. You are out there as sharp tools in the toolbox. The fact that some of the business owners aren’t availing themselves of that advantage. You don’t need a huge edge. You need a little edge. If you can get a little bit 2% here and 3% here and 4% over there. You go, “Quit doing that thing and paying that feed starve analysis,” which part of your business doesn’t deserve the allocation of capital. Dad did that. Dad’s dead. Don’t do that anymore.
Your point is relevant. You’ve nailed it on the head. First off, business owners shouldn’t be embarrassed about what they don’t know. We already know that. We’re here to help you. We want to help you. We all care. The stuff we’re telling you is because we’ve helped hundreds and hundreds of business owners. It’s not because we’re smart. It’s because of our experience and what we’ve done in our lives. Use that to your advantage. I get passionate. I’ll stop right here. I want to help these small business owners. I commend you, Jim and Allen for helping because you are smart guys. You could work anywhere, but you choose to work with small businessowners because we care. We want to help you. We want to help you get through this difficult time. I hope to your point, Bob, that’s what they hear. They’ve taken little tidbits. It’s always that simple thing and the light bulb goes on. They go, “I’ve heard this before, but it was the way you said it. I hope there’s something we said now that the light bulb went off and they’re going to call us.
There’s the business owner that maybe is fighting it and brings in the appropriate coaches and stuff and falls in love with their business all over again. They go, “I’ve decided that I’m not going to sell. Furthermore, I’m going to add some more. I’m going to go out and acquire.” You think about that and you go, “The outcome is not necessarily a sale.”
It’s not always. Bob, if I could add one thing, here’s a piece of advice I tell everybody. Pick somebody you trust, pick an advisor you like. I tell people if you could spend an hour with a smart person that has a lot of experience, has your interests at heart, this is well worth it to start. Whatever the consulting rate is, start the process talking about what are your pain points? Allen and I have worked for some great CEOs. They had lots of people. They ate lunch and breakfast with advisors constantly trying to gain knowledge about, “How do I help my employees, my clients, all the things in my business?” It’s that. Start the education process. Sometimes it takes a while, but that’s super important.
I tell people all the time, “I doesn’t matter if you have a $200,000 a year business or you’ve got $100 million business.” You must understand business and seek improvements constantly. I hope this is a good takeaway. I have come alongside many companies that have grown from $15 million, $20 million now or $100 million companies and all the while they started with an accounting manager. Then they had a controller. Then they had a CFO. I don’t compete against their accounting people. I come alongside. I support them. I am trying to provide another perspective that they can pull into the mix. “What other things can we do?”
If my balance sheet is in trouble, you have to get somebody that’s going to give you advice that can sometimes get in the weeds, drill down in your accounting entries and how you’re booking your accruals, all the way to advising you on the strategic plan. Your advisor comes alongside you. I’ve got multiple clients like that. I’ve done that. I get it all the time. The CFOs always will tell me or the controllers, the accounting managers, “We’re glad you’re here because you’re not trying to compete against me. You’re here to help me. You’re making my owner smarter that understands what I’m trying to do. I’m trying to make a book accrual entry so I can get my balance sheet right. I’m trying to have enough people to reconcile the cash.” It’s those little things. You can think about that, it’s not a big lift, meeting one hour a month with a good advisor would be great for you. Get started.
Allen, you’re looking across business after business as you come and review and do your work. If you had a parting piece of advice to that businessowner out there, what might that be based on what you’re seeing now?
Based on the things that I see and the difficulties that businesses have with recognizing, realizing value is, first and foremost, get trusted business advisors alongside you. The grim predictions that you were talking about a moment ago that these companies that don’t transition, what’s the alternative? I’m getting old, but it’s better than the alternative. If we don’t transit these businesses, oftentimes they close their doors. There’s nothing to take over the business. Without getting into the weeds, but strong financials, get the bookkeeper to get your financials together, get an audit from time to time, get your business valuation so you have a benchmark. Refresh that business valuation as you move forward in the process. Those are some low-hanging fruit items.
Bob, I say this all the time when I make presentations or I meet with people, I doesn’t matter if you’re an owner that is 25 or 55. It doesn’t make a difference to me. Think about a ten-year roadmap for ownership transition and get ready for sale. If I had ten years in front of me and I could start planning now in a methodical manner to get to the desire results. Either way, I’m trying to get to what do I want to be doing both personally and professionally? What’s the company doing? What’s the financial wealth I’m trying to get to? If you can look that far out, achieve those goals and try to look at that, it helps you with your decision making and your plan overall. It drives that every day.
Maximizing Business Value: The sooner you start planning, the sooner you create better opportunities for yourself, your employees, your family, and everybody involved.
I’ve got 1 or 2 owners that I started with. They’re in their late 30s, 40s. Now, they have lots of opportunities. They’ve done some internal transition. They could sell the company. They could buy more companies. It’s all about creating alternatives and opportunities. You don’t want to wake up when you’re 65 and say, “It’s time to sell the business to my employees or to an outside person.” You must consider both. The sooner you start planning, the better it is. The sooner the better for you and it allows you to create opportunities for yourself, your employees, your family, everybody involved.
I appreciate you sharing the wisdom of experience. You’ve been down the path and taking the lumps along the way to learn what you know. Before I get off here with you is to contact information. Allen, how do we find you?
You can reach me at our website, which is IBVA.com. We are rebuilding our website. It’s going to be IBVAPros.com. I’m on LinkedIn at Allen Harvey MBA-BCA. My phone number is (303) 475-3638. Anybody can call me directly anytime.
JimGilbertCPA.com, Jim@JimGilbertCPA.com is my email address. The phone number is (720) 212-1715. I’m on LinkedIn as well. I’m glad to spend time with anybody if they want to talk through things.
Marla, thanks again for helping me cohost this effort and series. It’s a challenging time or can be for some of the business owners. As we go through and do these episodes, I’m hoping that we all extend the hand somehow or another for some of these other business owners and try to help them along. I hope this is how they view this. It’s a continual effort. The side benefit and the best part is I get tutored by smart people every episode.