Business Valuation

Key Takeaways

  • A coach will help you take a step back, look at the bigger picture, and review whether you are actually focused on the right things, and if you are, whether you are approaching them in the most effective way.
  • If coaching is offered as a remedial measure, it's often too late. The real benefits are generated when it's used proactively.
  • The right chemistry between the coach and the coachee is important to create the necessary level of openness to achieve the desired results.
  • When working with a coach, you need to define your overall objective and then spend time with your coach to agree on very specific goals upfront so that you can evaluate the benefits for yourself.

Read Full Interview

Jeff: Professional coaches are not just for athletes and sports teams. In fact, if you've ever wondered just how much a coach can make a difference to your bottom line and business valuation, well, then you've come to the right place.
 
From our studio in Southern California, with guest experts from across the country and around the world, this is "Deal Talk,” brought to you by Morgan & Westfield, nationwide leader in business sales and appraisals. Now, here's your host, Jeff Allen.
 


Jeff: Hello and welcome back to the web's number one content source for small business owners committed to building a business for eventual sale. Here on "Deal Talk" it's our mission to provide information and guidance from our growing list of trusted experts worldwide that you and all small business owners can use to help you build your bottom line and improve your company's value.
 
There are many varied perceptions out there about the value of a coach or coaching teams. One common perception is that coaches consult primarily with individuals to help them improve their individual performance. But my guest on this edition of "Deal Talk" is here to talk about business and how working with a coach can have a positive, enduring influence on your company's overall performance.
 
Joining me from her home office in the U.K. is Dr. Janine-Nicole Desai, professional business coach at the company she founded, Outside Partner. Dr. Desai, welcome to "Deal Talk," it's good to have you.
 
Dr. Janine: Thank you very much, Jeff. Thank you for inviting me to talk to you today.
 


Jeff: Well, it's my pleasure entirely. And if you don't mind, I'd like to call you Janine. Will that work for you?
 
Dr. Janine: Of course, thank you.
 

Being at the top for extended periods of time can be a very lonely place. And having somebody whose only reason for being there is for you to be as successful in your professional life and as relaxed in your personal time as you can, that's what many coachees value very highly.


Jeff: You have a very interesting story. And I thought maybe before we break into this conversation here, we get all serious here. But Outside Partner, the name stands out, Outside Partner. Tell us, you've got an interesting story about your company name.
 
Dr. Janine: Yes. I'm a very passionate ballroom dancer. Outside Partner is a position in ballroom dancing that allows one partner to move forward more freely. Ballroom dancers need to find their own equilibrium and coordination despite requiring continuous support through their partners to create the most impactful moves. In the Outside Partner position, the contact points are minimal. But they continue to be highly effective to complete the picture. And that's exactly what coaching is about and what I'm trying to do with my coaching approach.
 


Jeff: And obviously, you have a passion about ballroom dancing, something you're very accomplished at and then, of course, coaching. And so Outside Partner, through your company, you've managed to marry two ideologies or philosophies, or two passions that you have.
 
I thought that what we would do is we would start by talking to those entrepreneurs and our audience a little bit. So many of us and for so many important reasons are very narrowly focused on growing our businesses and improving our company's value at the same time. Can you talk to us, Janine, about a link, if any, between coaching and the improvement of bottom line numbers that in fact show your growth?
 
Dr. Janine: You talk about focus. And being focused is probably the best way to increase the value of your business. But when you're fully absorbed by something, it is also easy to ignore what's going on around you. So it's critical to also take a step back, look at the bigger picture, and review whether you are actually focused on the right things, and if you are, whether you are approaching them in the most effective way. And this is where coaching comes in.
 
By now, the benefits are very well researched and documented. A study by PricewaterhouseCoopers is one of those widely quoted. PwC concluded mean ROIs of about seven times the original investment. And that's your bottom line impact. Other studies are going much, much higher than that.
 


Jeff: That's quite fascinating, very, very convincing figures indeed or so it seems. But it must be difficult to make a clear link to financial results. Is that correct, or am I just thinking that it might be difficult to make that link?
 
Dr. Janine: No, Jeff, that's right, absolutely. You have to be very clear about what you are aiming to achieve with coaching and then put measures around it. But by now, the impact of coaching has been studied so many times and in so many different contexts delivering similarly positive results so that you can have confidence in the bottom line impact of professional coaching.
 
Another valuable indicator is the direct feedback from executives who've actually done it. The most recent study that I've seen was published by the Chartered Institute of Personality Development (CIPD) in the U.K., and that was only a few weeks ago.
 
The CIPD is one of the most preeminent professional bodies conducting independent research into people and organization development globally. And their study concluded that 92% of coachees rate coaching as highly beneficial in delivering the results.
 
The reality is that there are a lot of variables at play in making a direct link between any business initiative and financial results. And there can be very valuable targets that are not directly quantifiable in dollar, pound, or Euro returns. But they still have a significant impact on the bottom line.
 
So I would recommend to measure return on expectations. Meaning, when you know why you want to do it you define your overall objective, and then you need to spend time with your coach to agree on very specific goals upfront so that you can in a very straightforward way evaluate the benefits for yourself.
 


Jeff: There's a very interesting statistic that you mentioned in the middle of your comments there. You talked about 92% of coachees rate coaching as highly beneficial. So that's over 9 out of 10. And you can't help but really wonder of those 92% of coachees rating coaching as being beneficial how many of those individuals may have had their doubts in the beginning, or may have not even considered getting the services of a professional coach to help them in improving their company's performance. It's really quite stunning when you think about it.
 
Dr. Janine: Yes. Actually, another very interesting statistic because only 9% of employees according to this same study are currently receiving coaching.
 


Jeff: Only 9%...
 
Dr. Janine: Yeah, 9% of employees enroll.
 


Jeff: That's fascinating. How do I know who if not me, how do I know who in my company would benefit from having a coach to work with? Is there a way that I can put together some evaluation process to help me determine which departments or aspects of my business could benefit most from coaching?
 
Dr. Janine: Everybody can benefit from coaching. So the question would be where you get the highest returns, and that usually takes you to the leadership roles, because they cast the longest shadow. For anyone with people management responsibility, you usually get a multiplying effect, as they often start to approach their line management job in a different way, and then over time, coaching techniques also transferred.
 
Then there are other critical positions in the business. Anyone who has a particular demanding target or a special challenge to navigate at the moment.
 


Jeff: Dr. Janine-Nicole Desai is the founder of Outside Partners. She's a professional business coach, and she comes to us today from the U.K. My name is Jeff Allen. You're listening to "Deal Talk," and we're once again glad to have you with us, everyone.
 
When you see a client for the very first time, what are some of the most common issues, Janine, that you find that can be improved through coaching?
 
Dr. Janine: Any themes relating to leadership are very common, and that could include shaping and executing business strategy, structure resourcing reviews, what to focus on and sticking to it, managing difficult relationships whether that be internally or externally, having those critical conversations.
 
There's a long list. More examples delivering positive change in self and others, and that covers a lot of coaching assignments. What is in particular demand at the moment are themes around overcoming obstacles and developing resilience. And that's because the demand and complexities of the business environment are constantly rising, be that due to new technologies, globalization, the political environment, etc.
 


Jeff: And I know that when you go into a situation, no matter how many you go into, every situation of every client is a little bit different, because every company is different, their needs, as a result, are completely different because we're talking about different personalities, different expectations, and different strengths and skill sets.
 
I'm under the assumption that many businesses also draw on coaches to tackle underperformance on very specific issues, very specific problems, before they become a real issue to the overall performance of the company. Tell us a little bit about that. Is that true? Are you often called in to just speak to certain types of problems, to help businesses overcome these piecemeal, a la carte-type issues?
 
Dr. Janine: Yes, again, Jeff, that's a good observation. Historically, lots of organizations have used coaches to tackle specific issues before they became derailers. But that is less and less the case. If coaching is offered as a remedial measure, it's often too late, and the real business benefits are generated when it's used proactively.
 
So today, coaching is seen more and more as an investment in the best people. I remember reading an article published in the Harvard Business Review calling having a coach a badge of honor. The same article suggests that there is no question that leaders today need constant coaching because of the ever-increasing complexities we just mentioned in the business environment.
 
Thinking specifically about your listeners, I would imagine that for many of them, coaching would be an investment in themselves. I understand many are self-made leaders with an exceptional commercial nose. Often, they've built their businesses to a size, but they may need to rethink, adjust their own style, and perhaps review ingrained personal or business practices.
 
Where do they get their inspiration from? How to know where to start? In the end, they're very smart, determined people. They could do it on their own. They probably could take anything on, but may find it much more enjoyable to have somebody to work with.
 
Being at the top for extended periods of time can be a very lonely place. And having somebody whose only reason for being there is for you to be as successful in your professional life and as relaxed in your personal time as you can, that's what many coachees value very highly.
 

Everybody can benefit from coaching. So, the question would be where you get the highest returns, and that usually takes you to the leadership roles, because they cast the longest shadow.


Jeff: It just seems to me that the longer that we're in a position, the longer that we are ensconced in perhaps a situation where our judgment is clouded or our judgment or our mindset is so narrowly focused. We don't always have the luxury of being able to have this 50,000-foot elevated view of what's going on.
 
My next question before we go to the break then, Janine, how can we be certain whether hiring a coach would actually create the kind of change that can drive improved, measurable results?
 
Dr. Janine: The Harvard Business Review study I quoted earlier came to another key conclusion. Those executives who have a fierce desire to learn and grow, they get the best results. And if they are partnered with a quality coach, that's a powerful combination.
 
The critical ingredient for me is the right chemistry between the coach and the coachee. This is hugely important to create the necessary level of openness, and balance support and challenge to achieve the desired results. Of course, we coaches, we are no magicians. In the end, taking action and sticking to commitments come down to the individual.
 
Let me give you an example from the world of sports. I don't know whether you happen to be into tennis, Jeff. Novak Djokovic, for example, he's had a series of great coaches, and not long ago changed to Boris Becker. This has refreshed his approach successfully again and helped him move into the next phase of his game. But in the end, it's not Becker, it is Djokovic who has to go out there and do the job. And even the number one doesn't win every time.
 
Coaching is about raising awareness, looking at situations from all angles, and then finding solutions from within yourself. A quality coach not only facilitates that process but then also encourages you to take responsibility for action and holds you to account to your commitments. Committing to a coaching program is about stretching yourself and doing a bit more every time.
 


Jeff: Excellent points. And I enjoyed your example of using Novak Djokovic, too, in your story and relating just how important using a coach is. Such as Boris Becker and his particular situation have been so key to his continued success.
 
My name is Jeff Allen, and we are going to come back with special guest today Dr. Janine-Nicole Desai of Outside Partner talking about how impactful having a professional business coach can be to you and your business, your company and why when "Deal Talk" resumes after this.
 
If you'd like to share your knowledge and expertise on any subject related to selling businesses or helping business owners improve the value of their companies, we'd like to talk with you about joining us as a guest on a future edition of "Deal Talk." Interested? Contact our host Jeff Allen directly. Just send a brief email with "I'd like to be a guest" in the subject line. In a brief message include your name, title, area of specialty and contact information, and send it to jeff@morganandwestfield.com, that's jeff@morganandwestfield.com.
Selling your business may be the most important business transaction you'll ever undertake, so don't go it alone. Work with an organization that has made it their business to sell businesses and that's all they do. Morgan & Westfield at 888-693-7834. At Morgan & Westfield we know that selling your company is not something you should take lightly. It can be a stressful, difficult, even emotional process. That's why it's important to work with a team whose one and only specialty is selling businesses throughout the United States. And Morgan & Westfield will help you every step of the way, from helping you plan your exit strategy, to preparing a comprehensive appraisal, and locating the right buyers.
 
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Jeff: "Deal Talk" is the show, my name is Jeff Allen talking today with Dr. Janine-Nicole Desai. She is a professional business coach from Outside Partner in the U.K. Dr. Desai, once again, I appreciate having you on this program, wondering if you might have there with you an example of a real-life story that you'd be willing to share with our audience or case study showing just how important coaching can be in creating real results in the improvement of businesses.
 
Dr. Janine: Well, Jeff, there's a variety of case studies and lots of them are published. It really depends on what situations your listeners are facing at any particular time to choose the most interesting scenario.
 
But let me give you an example of somebody I worked with recently that may resonate in the context of the broader theme of increasing the value of a business. It is one of those examples that really shows you can just be too close to the issues and make assumptions. And often it is the questions that may appear naive and very basic at first which deliver the best results.
 
In this case, a general manager of a business just ahead of 40 million turnover, so that's in pounds, in dollars that's just under 60 million, I suppose, has been running the business quite successfully for many years. And successfully in this case meant the business has always been profitable and showing some top line growth. But the margin started to be increasingly under pressure as competition was heating up and growth flattened.
 
This general manager probably started moaning and cursing the competition before he decided he needed to do things differently. In this case, it was coaching that made him step back and go through the most fundamental questions articulating his thoughts aloud, questioning himself aloud. And then in turn, that made him ask very different types of analyses from his team.
 
And looking at the numbers differently, they, as a team, realized that they had always been very volume-focused and never really analyzed the profitability of every single piece of business they took on. And over time, they gave more and more margin away trying to keep some long-standing customers. And even lost money on a series of contracts without any contribution benefit.
 
He only then realized that he had always taken for granted that the wider team was sufficiently commercially aware, but for all intents and purposes as a team, they had become what can only be described as busy fools. There was never sufficient time to think about it more and to think things through.
 
And with these new insights, he initiated a big profitability drive in the business, geared everybody up to drop any profitable contracts almost with immediate effect, as much as that was possible, even if that meant a short-term revenue drop. And the time gained could then be channeled into replacing that business profitably, and also better looking after their existing still profitable clients, keeping them from considering other competitive offers.
 
It all comes back to the point of proactivity we touched on earlier, how much value could've been created much sooner if that level of reflection had been part of general business practice rather than something which only happened as a result of pressure?
 


Jeff: Which begs the question, does this not suggest that coaching should happen internally, inside the company as part of day-to-day business interactions on a regular and frequent basis?
 
Dr. Janine: Absolutely. Many progressive organizations are now spending time to build coaching cultures, making a big difference to their businesses, the key benefits around improved communication, clarity of expectation, and drive to improve.
 
The role of an external coach is different and complementary. Very often, businesses don't yet have the capability to coach internally and may need somebody to help them in developing it. But even if they do, a professional coach offers an external perspective. They're not involved in internal politics, and there's no confidentiality or sensitivity barrier. And therefore, external coaches can challenge in a very different way. They work with you as a partner and are not there to judge you or evaluate your performance in any way.
 



Jeff: Very important indeed, because you've got somebody that you're talking about bringing into your company who has no biases. There are no axes to grind. They don't know you. They are trying to get to understand where the weaknesses are to help you overcome your challenges, to think differently, and to do some different things that will help get you from point A to point B.
 
Dr. Janine-Nicole Desai is the founder of Outside Partner. She is a professional business coach joining us from the United Kingdom today on "Deal Talk," and we're so happy to have her with us. Janine, is there anything that our business owners or listeners can do right now to help them determine if hiring a professional coach is in fact something that they should consider?
 
Dr. Janine: Yes, they could just have a go and perhaps ask themselves some coaching questions. Examples could be, do I take sufficient time to reflect on what the biggest levers are to drive my business forward? Do I have enough challenge around me? How sure on a scale from 1 to 10 am I that people speak their mind around me? Does my leadership team give sufficient time to coach people? Do we actually know how to do it? What are the critical roles in my business who have a particular challenge on their hands at the moment, and are we doing enough to support them? Who are the people I really don't want to lose, and do I invest in their ongoing development? What is our main business priority at the moment, and how do we align everybody to it? And then finally, what type of business organization do I want to leave behind when I eventually hand over?
 
These are just a few examples of questions that might lead your listeners to consider hiring a professional coach.
 


Jeff: We're all interested in added value. And I'm wondering just how much staying power the coaching that I will be provided will provide me with as I move on through the years well after my business is done and I've long since retired. Tell us about any benefits that we might see from coaching that will continue to influence us long after we've left our companies perhaps.
 
Dr. Janine: Managing transition is another very common area of coaching at various stages of people's lives. Typical crossroads are which job to take, which business to go after, when to retire, what to do next. Letting go is hard to do for many people, and the coach is great to help you think these questions through and prepare for the transition after retirement.
 
Goodness, it depends whether you are looking to take on a new challenge straight away in a completely different field perhaps. But the techniques that you would've learned whilst undergoing coaching yourself, you're doing coaching for a significant time and trying different approaches, they will always stay with you.
 


Jeff: So as we begin to wind things down here on this edition of "Deal Talk," Janine, tell us, how do we find a good coach? And I ask that question because from our interactions, there are so many folks out there who have decided to make consulting or coaching their life's work after they've gone on to do some other things. But you're someone who is focused in this area. This is your business. This is what you do. And you've had a chance to talk to and consult with many businesses, many individuals and professionals. And so I know that you can help us cut through the clutter and make some important decisions here. How do we find that coach that we need?
 
Dr. Janine: Yes, of course, I also base my experience on 20 years of work on the corporate side.
 


Jeff: And that's so key, that's important.
 
Dr. Janine: ...for coaches and what I would've looked for. And of course, word of mouth is always a good start, or somebody you've come across and feel you would like to work with that person. A quality coach is likely to have complete and substantial accredited training with a reputable academic or coaching provider, and have a good amount of life experience.
 
A good coach does not need to understand your business nor your sector. Actually, that can be counterproductive. But you need to be able to respect your coach for who they are and what they've done. In the world of coaching, there are many different schools of thought and approaches. I would suggest that you are very open in your exploratory conversation about what works for you and what doesn't. And the rest is about chemistry.
 
Some shared interests and common values will help the relationship initially. But please, please, don't look for somebody like you. Feel-good chats are unlikely to lead to meaningful personal change. A rich conversation comes through diverse perspectives and adding different angles. And that is the main purpose of your coach. On the other side, you should enjoy having a conversation with your coach and be able to trust him or her quite quickly.
 
For coaching to work, openness is vital. And you must allow your coach to challenge you, challenge you quite hard. Look for somebody where you would find that easy to do.
 

Of course, we coaches, we are no magicians. In the end, taking action and sticking to commitments come down to the individual.


Jeff: Dr. Desai, if there are those individuals who would like to get in touch with you, how can they reach out to you, connect with you, and talk to you about their particular situation with the possibility of obtaining your services as a business coach?
 
Dr. Janine: That's very easy to do. Look up the Outside Partner website on www.outsidepartner.com, and you can get in touch very easily by email via that website.
 


Jeff: Dr. Janine-Nicole Desai, we have really enjoyed our time with you today. And I want to thank you so much for making time in your schedule to join us today on "Deal Talk" to share your perspective, your insights, and why coaching can benefit your business, your business's bottom line, and your ultimate value. Thank you so much for joining us today.
 
Dr. Janine: It has been wonderful, Jeff. Thank you very much.
 


Jeff: Dr. Janine-Nicole Desai, business coach and founder of Outside Partner joining us from the United Kingdom today. Morganandwestfield.com, it is the only one of the four channels online where you can not only hear this show, but you can download the complete show notes. There is a summary there and also a PDF file with all of the comments. Everything that you hear us say right here on this program you can download in text form to whatever device that you're using there and you can share it with others.
 
Don't forget that "Deal Talk" is brought to you by Morgan & Westfield, the nationwide leader in business sales and appraisals. Learn more at morganandwestfield.com or by calling 888-693-7834. I'm Jeff Allen, until next time, here's to your success.
 
While we take reasonable care to select recognized experts for our podcasts please note that each podcast presents the independent opinions of such experts only and not of Morgan & Westfield. We make no warranty, guarantee, or representation as to the accuracy or sufficiency of the information provided. Any reliance on the podcast information is at your own risk. The podcast is for general information only and cannot be considered professional advice.
 

Key Takeaways

  • A business needs to compare itself with the best in class and understand how the company is performing against them.
  • When customers have a better experience through the purchasing process, they will come back and recommend other people.
  • It is important for businesses to look in the mirror and take both an internal and an external view at the company.
  • An internal look at your company notes the strengths and weaknesses, and an external view looks at the opportunities and threats.

Read Full Interview

Jeff: Getting the most and best out of your team, if you want to know what that means with examples of how human performance directly impacts your company's bottom line and overall value, you've come to the right place.
 
From our studio in Southern California, with guest experts from across the country and around the world, this is "Deal Talk," brought to you by Morgan & Westfield, a nationwide leader in business sales and appraisals. Now, here's your host, Jeff Allen.
 

Jeff: Hello and welcome back to the web's number one content source for small business owners committed to building a business for eventual sale. Here on "Deal Talk" it's our mission to provide information and guidance from our vast, growing list of trusted experts that you and all small business owners can use to help you build your bottom line and hopefully improve your company's value. 
 
This idea of human performance and the idea of getting more not only out of yourself but out of your people. We're wondering how does that translate to increasing the value of your company or certainly making it more productive. We've got somebody on the line today who I believe is going to be able to really give us some true insight into this idea. 
 
If you are wondering about how you might be able to improve your performance, improve the performance of others who work with you in your organization to get the best out of them and to be the best that you can be, you've come to the right place. This show is for you.
We're joined by our special guest today. His name is Darrell Gunter, he's Digital Publishing Executive, Executive Coach, M&A advisory, he wears many hats, as the President and CEO of Gunter Media Group. Darrell Gunter, I want to welcome you to the program. Welcome to "Deal Talk," sir, it's good to have you.
 
Darrell: Thank you so much, Jeff. It's a pleasure to be on your program.
 

There's something in the psychology term called Johari's window. It's the side that other people see that you don't see, and that's what a business wants to do, a business really wants to have someone to help them see their Johari's window so that they could address those particular issues.


Jeff: I was looking forward to chatting with you, Darrell, because we deal with so many tangibles on this program. We talk about the process of selling a business, the process of the M&A process, and the different stages and steps. We talked to people about how others can improve their businesses by things that you can almost touch, feel, taste and hold, the things we know about: financing, capitalizing and equipment purchases, real estate, lending, all of these things, and how to get legal, and how to do things properly, and how to grow your business, take it to the next level. 
 
The idea, though, of improving performance, this is something that is a little bit different. I know a lot of people may have different views on it. This is your specialty. Tell us a little bit, first of all, about yourself, how you got into this area, and how you've actually seen it work to improve those companies that you have consulted with.
 
Darrell: Absolutely. I'm a Seton Hall graduate, born and raised in Atlantic City, New Jersey, grew up in my family's grocery store business. I went to work for Xerox. I wanted to get the training from the best. That was back in '81. After two successful years at Xerox, I went to work for Dow Jones Financial News Services, which deals with the news wires, which becomes The Wall Street Journal the next day. 
 
And after a very successful year at Dow Jones, I was recruited over to be one of the first managing directors of Elsevier's regional sales office. They have four regions across the world, and I was interviewed for the Americas position. I was there for 11 years, led sales globally. After 11 years at Elsevier... I come from a family of entrepreneurs, so I decided to launch Gunter Media Group, focus on helping businesses to scale.
 
We've been in business now for over five years, and I'm also an adjunct professor at Seton Hall University, where my colleague and I, John Hoffman, we teach Consultative Sales to the MBA program. I also lecture at Rutgers-Newark, and I lecture to their Entrepreneurs Pioneers Initiative Program. And what I've been lecturing to them over the last five years is how do you build a high-performing team.
 

Jeff: Well, Darrell it's really fantastic getting to hear your story, and we appreciate you taking the time out to be with us today. I'm a business owner. I'm interested in taking my business to the next level. Tell me, is there any proof to show that improving my team's performance can, in fact, lead to measurable business growth that can also result in improved value of my company?
 
Darrell: No doubt about it. I'm sure if your audience is not familiar with the net promoter score, net promoter score is a device where you have folks give you a rating, one to ten. And nine and ten is what is considered positive, whereas six to eight is considered ambivalent. And of course, anything five and under is considered to be not good. And you always want to have a positive net promoter score.
 
And what you'll find is if you look at the particular critical path of your customer, and if you really look in the mirror and be honest with yourself, and you ask yourself, is it easy for people to do business with us? And when you look at that and get a look at how easy is it for someone to do a transaction with you, if someone is purchasing an item and you have to ship it to them, are there any glitches along the way? Are your folks being polite to your customers genuinely so that the customers would want to come back and also recommend?
 
What you'll find is that folks who are suffering from problems from their folks being polite, knowing processes and procedures, and managing the customers’ critical path through your business, when you find that that is not going well, you will see that your performance will be greatly affected. If you were to greatly improve all of those various different factors, you're going to speed up the process by which customers do business with you. You're going to get more transactions. People are not going to, as they say, get out of line and decide to buy it somewhere else. So absolutely, there's no doubt it. 
 
There's a lot of different studies where folks have shown that when folks have a better experience through the purchasing process, with the service process, that they will come back and they'll recommend other people. 
 

Jeff: Many business owners may already feel that they and their teams are giving it 110% every day. Just touching on some of those things, for example, that you just talked about, about understanding the true significance, the value of the relationship that you have with your customers, and the regular nuts and bolts thing, the pencil pushing that we have to do, and the calls that we have to make, the orders that we have to fill, the people we need to speak to. We're trying to cram as much stuff as we can into every day that we go to work. How can we possibly give more than that, Darrell?
 
Darrell: I think each business has to really look in the mirror. I’m always talking about looking in the mirror. They need to compare themselves against the best in class. If you compare yourself against the company that's best in class, you're going to find some serious warts on your own business that gives you the opportunity to address them. 
 
There's something in the psychology term called Johari's window. It's the side that other people see that you don't see, and that's what a business wants to do, a business really wants to have someone to help them see their Johari's window so that they could address those particular issues. And sometimes those issues, especially in small businesses, family-owned businesses, it could be a relative that is underperforming but no one wants to talk to Jimmy's nephew because they're afraid there's going to be some repercussions. Or it could be a husband-and-wife team, and of course, you have those dynamics that you have to deal with. And then there's the inconsistency of managers, how they might treat one employee one way and another employee who's doing something similar a different way.
 
It's a lot to look in the mirror and say, "What is my SWOT analysis, what is PMI, my pluses, minuses, and interesting points?" Because, as you know, we're all humans and we're all capable of making many mistakes. But what does Einstein say? The definition of insanity is doing the same thing over and over again expecting a different result.
 

Jeff: Darrell, Einstein was right. I believe that absolutely to this day, and I think about that every so often because I can do some pretty insane things. Quite frankly my wife will make sure that she lets me know about that. But tell me, you talked about SWOT analysis. I've heard about SWOT analysis. There might be members of our audience who aren't familiar. Can you tell me what that is and how that works with you and your clients, and how you use that SWOT analysis?
 
Darrell: Absolutely. Back in the day when I was at Seton Hall, still in the School of Business as an undergraduate, we were not taught SWOT analysis. I did not get that until graduate school, at the Lake Forest Graduate School of Management. Now they are teaching the SWOT analysis in undergraduate business school, and I think it's very important. 
 
When you look at a business, a proprietor needs to look at whether there's strengths, whether there are weaknesses. And this relates to their product, their pricing, their process and procedures, all of the different dynamics that make up a business, and that's an internal look. And then the opportunities and threats is an external look. Whether there are opportunities in this marketplace that we’re currently not taking advantage of that we could take advantage of if we do some things differently, or after some new blue ocean space, and then what are the threats. 
 
And we think about threats, threats, of course, you're competitors, it could be technology, it could be government sanctions, it could be a host of things depending upon your business. I'll give you an example. You know those hoverboards that people are riding now? 
 

Jeff: Yes.
 
Darrell: Now people are saying, "This is a great business." However, the government has started to clamp down on those particular products because they're not safe and they're catching on fire. When you look in that particular business you really need to understand the macro and microeconomics of your business. And so your strengths and weaknesses focus on your internal look, and then your opportunities or threats is an external view in regards to how you have to look at your business as well as your competition. 
 
And you need to understand and look at everything from, like I like to say, a macroeconomics point of view, and microeconomics in regards to your local environment that you have in your city, state and county government. And so it allows the individual to do the self-analysis.
 

This is going to be a day-in and day-out process. But with a road map or with a plan you'll be able to mark that improvement, and see that improvement, and see that improvement drops right to your bottom line.


Jeff: Darrell, how do we get from where we're at now, from the level of performance that we're seeing not just in our people and in ourselves, but at the end of the day the level of performance of our company. We're bottom-line type folks. We look at the dollar signs at the end of the day, the amount of money that we have in our bank accounts. We know where we're at. We also know where we'd like to be. So how do we get from point A to point B?
 
Darrell: You’ve got to establish a performance dashboard for yourself, you have to measure yourself, you have to set goals for yourself and measure yourself against those goals. Just recently I was talking to a gentleman, David S. Rose, who has a great book called “The Startup Checklist.” One of the things that he said is very key and applies to everyone is that you have some people who talk about starting a business, then you have people who start a business. It's about the business of doing.
 
But in the business of doing, you have to establish performance goals and measure yourself against those performance goals. And then you need to understand if you set a particular goal and you overachieved it, so maybe the goal was a little bit too easy and you need to set a tougher goal. Or if you set a goal with a performance measurement of 10 and you only got 2, maybe you made it too hard. What are the particular nuances about that particular performance measurement?
 
And what you do is that you say, "OK, in this business that we have we're going to use these measurements to gauge that success." And then you have to measure that every week and determine where are you in that process. And then you see that you're achieving your goals, then you need to establish higher goals for yourself. 
 

Jeff: But I think the thing here that is important too to follow up with, Darrell, and I'm sure that you'll agree with me, and we can come back and talk about it after the break, is the fact that if you're going to make this commitment toward improving the performance of not only you but your team, and you're going to be checking these goals and you're going to be finding out how you're doing, and you're going to be doing a lot of self-evaluation, you need to stick to it. You need to be consistent about it. You need to follow a routine schedule, and like you said, regular commitment to this is really, really critical in order to make sure that the process works and you can, in fact, get to where you want to go over time.
 
My name is Jeff Allen. We're talking about the correlation between performance improvement and increased value of your company, how you go about it, can it, in fact, be done, and what in fact you need to do in order to put all of these things in place in order to have the success that you want for your business. My name is Jeff Allen. I'm going to be back with Darrell Gunter, he's CEO of Gunter Media Group, when "Deal Talk" continues right after this.

If you'd like to share your knowledge and expertise on any subject related to selling businesses or helping business owners improve the value of their companies, we'd like to talk with you about joining us as a guest on a future edition of "Deal Talk." Interested? Contact our host Jeff Allen directly. Just send a brief email with "I'd like to be a guest" in the subject line. In a brief message include your name, title, area of specialty, and contact information, and send it to jeff@morganandwestfield.com, that's jeff@morganandwestfield.com. 
Selling your business may be the most important business transaction you'll ever undertake, so don't go it alone. Work with an organization that has made it their business to sell businesses and that's all they do. Morgan & Westfield at 888-693-7834. At Morgan & Westfield we know that selling your company is not something you should take lightly. It can be a stressful, difficult, even emotional process. That's why it's important to work with a team whose one and only specialty is selling businesses throughout the United States. And Morgan & Westfield will help you every step of the way, from helping you plan your exit strategy, to preparing a comprehensive appraisal and locating the right buyers. 
 
Without the right team behind you, you could be leaving money on the table. So don't leave your most important business transaction to chance. Call Morgan & Westfield for a free consultation at 888-693-7834, 888-693-7834, or visit morganandwestfield.com.
Are you a professional adviser, accountant, attorney, or a wealth manager, or do you provide other professional services? Contact us today to see how our reliance program can help you increase your firm's revenues. Call Morgan & Westfield at 888-693-7834. That's 888-693-7834.
 

Jeff: I'm Jeff Allen. Welcome back to "Deal Talk." My guest is Darrell Gunter. He is in New York and he is head of Gunter Media Group where he's President and CEO, a lot of experience as an M&A adviser with some of the biggest names in the industry. And he's put together high-performance teams that have led their industries. 
 
And he's joining us today because the idea of performance is something that is near and dear to his heart and he has been able to over the last 10 years work with a number of organizations both small and large across the country, coast-to-coast, to help them get the most out of their people, the most out of their organizations as a whole in order to take the performance of the companies to a higher level, and in the process, by the way, increase their values.
 
Darrell, I wanted to continue our focus on getting the most out of our teams. How can we begin the process once we know that we can, in fact, do better? Let's take a look at our teams. Let's say I've got it all together, I've got things figured out as the owner. You come in and maybe you'll evaluate and say, "Yeah, Jeff gets it." So how can we start to address the issues with our team in order to make sure that we are performing at the highest level possible?
 
Darrell: As I mentioned before, I think it's important that you have to really compare yourself to the best in class, and understanding where the top company in your particular business, where they're performing, and how you're performing against that. 
 
There's a great book called “How to Outthink The Competition.” And it's all about comparing yourself against the best of class. And then doing a gap analysis on your own business and being honest with yourself in regards to where you're doing well, where you're not doing well, where you could do better. And then seek out the various different tools and mechanisms that you can utilize to help you to achieve that, and realize that you're not going to change your organization overnight. This is going to be a day-in and day-out process. But with a roadmap or with a plan, you'll be able to mark that improvement, and see that improvement, and see that improvement drops right to your bottom line. 
 

Jeff: Have you seen instances, Darrell, where a business owner, or a CEO, or C-suite executive maybe at another level, will go in and he'll talk to his team, and have trouble getting buy-in right away because a lot of folks might think, "You know what, I'm doing as much as I possibly can do. I'm doing everything you're saying that you need me to do and then some.” But you just at first have trouble getting others on the team convinced that there are changes that need to be made in order for the company to perform at the level that really would benefit everyone.
 
Darrell: That's a very good question. You have to look first at… you got to have the right people on the bus. In Jim Collins’ book “Good to Great,” it's hard to get the right people on the bus. Which means that you really have to have your business well-defined in regards to what is the business that you're in and what type of people with what skill sets, and knowledge, and experience that you need to help fulfill that vision. 
 
And then, of course, meeting with your team and working with them. Make it a group think type of project where they're going to have input and they're going to be able to provide you with their feedback. And when you do that, when you're working with them hand in hand, it's coming from the ground up, which is a very, very good thing. 
 
You might have heard of Total Quality Management. Taguchi was the godfather of Total Quality Management. And it's really helping everyone who is in that value chain of events for your customer having them to be fully versed in regards to what their role is, and how they need to interact and communicate with their team members.
 
You do it in that type of way. You're going to get buy-in. And then for those who, let's say don't want to do it, they have the skill but not the will, they will most likely self-select out of the company.
 

Jeff: That sometimes can make somebody, a hiring manager's job, actually either easy or really, really difficult depending on the needs of your organization and how prepared you are to fill those shoes. Darrell, let me jump into something else right now. Actually, it's not completely disconnected because I know that you have some experience as an M&A adviser and you have had a chance to witness a number of deals and transactions over the years, and play a variety of roles within that. 
 
Have you seen situations where in your experience, a sell-side company, for example, may not have gotten all that it wanted to or expected to out of a deal, or thought that it might mainly because there might have been one issue somewhere down the line that actually was a flaw that was easy to fix but maybe the business owner or the people in charge were just too close to it? And maybe this has something to do with performance-related factors. 
 
And you were there and you thought, "Gosh, if they had only taken care of this and addressed it years ago or even last year before we sat down today they could probably be getting a heck a lot more out of this deal than they're getting today.”
 
Darrell: I call that the pebble in the shoe syndrome. As I walk to the train from South Orange to the train station to get to New York, sometimes a pebble will jump in my shoe. And I feel that pain, but because I'm trying to make that train I don't take it out. But when I get on the train I take the pebble out of my shoe. A lot of times businesses, they know where the pebble in the shoe is, but for whatever reason, they choose not to deal with it. And that pebble in the shoe doesn't go away. So when it's time to sell the company it's one of those issues that to the buyer is a huge deal. And it can really, really hurt the valuation of the company.
 
Let me tell you a true story. There was a company once, and I'll leave the name blank just to protect the names of the innocent. The company didn't have a CFO. And one board member said, "If you don't have a CFO by April, I'm going to resign from the board because your processes are way off. Your pricing doesn't make sense." The CEO eventually did hire a CFO. But unfortunately, the CFO started drinking the CEO's Kool-Aid. Therefore the pricing was still not consistent. 
 
Let's fast forward. We're now in a meeting with a company to acquire us and they asked the fundamental question about our pricing metrics. And the CFO could not answer the question. I think that company that day lost $5 million off of their valuation because of it. 
 
When you think about it ― if the CEO had truly addressed that issue that that board member had complained about... And by the way, that board member eventually did resign. He was just fed up with the inconsistencies. But had that problem been addressed, that company probably would not have needed to sell at that point, and if they did, they certainly would've received a higher amount.
 

Jeff: Absolutely. But right there that's a sobering story and a sobering reminder about having that pebble in our shoe, take the doggone thing out. You'll probably make your train anyway.
 
Darrell: That's right.

I think each business has to really look in the mirror. I’m always talking about looking in the mirror. They need to compare themselves against the best in class.


Jeff: Darrell, we're starting to wind down this program and I really enjoyed this conversation today. But what I like to finish off with today is to find out maybe a thing or two or three that you can share with us that you yourself practice in order to perform at your very best each and every day.
 
Darrell: Number one is that I have a couple of mentors and I have a couple of mentees. I often take a course in Coursera once or twice a year on something that I know absolutely nothing about, which allows me to what I call to sharpen my blade. Then I always try to teach someone something, because if I believe I know a particular topic I could be more effective in doing it if I can teach it.
 

Jeff: I don't think we can end on a better note than that. And with that in mind, I think it just serves as a final thought that if there is someone that we can help or someone that we can help improve, make their job easier for them, or help them perform at a higher level. And there's something that we can share that we know might add value to their life, to their job, to their company, and to others that they touch, that we're foolish not to share that with. 
 
Darrell, I just want to thank you so much for that. I know that we have a number of people who might be very interested indeed in talking to you about how you can probably help them in their particular situation. We know that everybody is different. Every situation in every company is different. But if they'd like to reach out to you, how can they connect?
 
Darrell: Two ways, one is my email address which is d.gunter@guntermediagroup.com, or via our website, guntermediagroup.com. I'm available on LinkedIn, Facebook, Twitter. I can be reached at 973-454-3475.
 

Jeff: This guy is real, he's grounded, and he knows a lot of stuff, folks. Please if you would, get in touch with Darrell when you can. It's going to be a great conversation you'll have with him. And I'm sure that he can answer some basic questions and his service is also there, of course, provided for you. If you have reason to call upon him for the purpose of seeking greater performance out of you, your team, your company as a whole, he'd love to talk to you more about what he can do for you.
 
Darrell, that's it for our time today. I want to thank you again for joining us on "Deal Talk," really enjoyed it.
 
Darrell: Thank you so much, Jeff, it was a pleasure.
 

Jeff: Darrell Gunter, CEO of Gunter Media Group, has been our guest today. He is a digital publishing executive, executive coach, and M&A advisory, and I hope that you enjoyed our conversation.
 
"Deal Talk" is available at morganandwestfield.com where you can find the complete show notes from this discussion. So after listening to the program if you'd like to go ahead and print that PDF and have it where you can find it and get access to it, look up some important key points from this discussion and share it with others, it's right there for the taking. Once again, the website is morganandwestfield.com. You can also listen to "Deal Talk" in any one of three other channels, available at iTunes, Stitcher and Libsyn. 
 
"Deal Talk" is brought to you by Morgan & Westfield, a nationwide leader in business sales and appraisals. Learn more at morganandwestfield.com, or by calling 888-693-7834. I'm Jeff Allen, I'll talk to you again soon. Here's to your success.

 
While we take reasonable care to select recognized experts for our podcasts please note that each podcast presents the independent opinions of such experts only and not of Morgan & Westfield. We make no warranty, guarantee, or representation as to the accuracy or sufficiency of the information provided. Any reliance on the podcast information is at your own risk. The podcast is for general information only and cannot be considered professional advice.
 
 

Key Takeaways

  • Morgan & Westfield’s one and only specialty is selling and valuing businesses. By specializing on this one endeavor, we have become focused, thus substantially increasing the quality of our services. As we’ve been in the business for more than a decade, we’ve become very good at what we do.
  • Our large backend support team is what mainly sets us apart from other business brokers, who work solo and have no support staff at all. Having a team of experts allows us to be more efficient in our processes, as opposed to a typical business broker who plays the role of a jack-of-all-trades.
  • Another main differentiator is that we cut the most time-consuming yet unnecessary roles of a broker in the deal, which is physically meeting with the buyers. We believe that there’s no one better than you, the owner, when it comes to showing your business to a buyer.
  • Our fees are highly competitive because we model them after other professionals like accounting and law firms. Because we’re efficient, we spend less time on each deal. By spending less time, our costs are reduced, and thus we can charge lower fees.
  • Everything we offer is on an a la carte basis. You have the option to select only the services that you need. You can even bring in your professional advisors, such as your accountant or attorney, to the conversation to help you make the most intelligent decision.
  • Whether you’re ready to sell now or later, Morgan & Westfield can help you. If you’re set to sell, we’ll prepare a framework of recommended steps that is customized for your business and walk you through the sale process. If you wish to prepare for the sale in advance, we can provide you an exit plan, value your business, and help you increase the value of your company.

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Jeff: The Morgan & Westfield Podcast, an ongoing series of conversations with Morgan & Westfield President Jacob Orosz. On this edition, who is Morgan & Westfield? And that’s exactly what we start by asking Jacob.

Jacob: Jeff, thanks for having me. We are business brokers and appraisers. Our one and only specialty—and that is our one and only specialty—is selling and valuing businesses. We have sold businesses in nearly every industry and in every state in the country. Personally, I’ve been in the industry for nearly two decades, and I started Morgan & Westfield almost 10 years ago. 

Jeff: You said something very interesting, your one and only specialty. Now, you've made that sound very important. Why is it so critical to be good at just that one thing?

Jacob: It's just too hard to be all things to all people. When I first got started in this almost 20 years ago, I tried to be all things to all people. I tried to do too many things at once. Selling a business is hard enough, let alone when you try to, let's say for example—and a lot of people do this—but let's say you're trying to sell residential real estate or commercial real estate, or you're doing leasing, or you’re a financial advisor, accountant or attorney, and on top of that you’re trying to sell businesses. It’s just way too difficult. 

We have found that by specializing, that has allowed us to become very focused and actually substantially increase the quality of what we do. When you do one thing over and over again, you tend to get very good at it.
 
We have found that by specializing, that has allowed us to become very focused and actually substantially increase the quality of what we do. When you do one thing over and over again, you tend to get very good at it.

Jeff: Let's learn a little bit more about the person who makes up Jacob Orosz. How did you get into this business, Jacob?

Jacob: Well, I come from a line of entrepreneurs in our family, and I worked in our family manufacturing business for several years. And I got into selling businesses almost 20 years ago when businesses were actually sold in the newspaper. And I toured the whole country, traveling from Florida to California looking for the top business brokerage company to work for. And I ended up working for one of the most successful, top-ranked offices in the country. They had a total of about 200 offices, and I worked for their top office. 

I actually ended up leaving because I saw that their model for selling a business was broken. Their platform was modeled after the process of selling residential real estate, where real estate agents work on a local level. They advertise houses in the newspaper, drive the buyers around in their car, and work on a straight commission. 

Now don't get me wrong, that model works very, very well for the real estate industry, but it's proven that it is just not that successful for the business brokerage industry. 

The International Business Broker's Association, or the IBBA, publishes an annual survey. And in that survey, they ask brokers what percentage of their listings they actually sell. That number has hovered around 30% to 40% for the last 10 years, so the proof is right there. The model that is currently being used is not the most successful model that could be used. And because it was a larger corporation I was working for, there really wasn't much I could do to improve the system. And I really wanted to change the industry, so I decided to start my own company.


Jeff: So with all of that in mind and with the things that you thought were broken at that larger corporation, what did you bring to your concept for Morgan & Westfield to make your business different? How is Morgan & Westfield different, and in fact better than the way that other brokers may be used to working?

Jacob: The biggest difference is that we have a large support staff, like accounting and law firms. Most brokers are solo, with no support staff at all. Or if it is an office with multiple agents, again, zero support staff. So what impact do you think that's going to have on quality and efficiency? Quality and efficiency go hand in hand. If you're not efficient, what impact is that going to have on cost? What's more efficient: a team of experts or a jack-of-all-trades who has to juggle it all and juggle it all for dozens of clients at the same time?


Jeff: I know that certainly with the companies that I have dealt with, with both personal- and business-related matters, I've always found it easier to work with an organization that did have individuals that handle different aspects of what I needed to be done, and so I agree with you completely. It does certainly seem that your particular business model is much more efficient than what we would typically be used to from traditional business brokers. 

Let's talk about any other differences or advantages that you can point to with Morgan & Westfield.

Jacob: Another major difference is that we cut out the number one investment of time in the deal, which is physically meeting with the buyers. We feel very strongly that this is unnecessary.
 
The biggest difference is that we have a large support staff, like accounting and law firms. Most brokers are solo, with no support staff at all... Another major difference is that we cut out the number one investment of time in the deal, which is physically meeting with the buyers. We feel very strongly that this is unnecessary.

Jeff: Why is it that you decided that it's not really important to meet with a customer face-to-face?

Jacob: Two reasons. Number one, the buyer feels more comfortable meeting with the seller directly, as opposed to having an experienced broker sit there observing and analyzing their every move. 

And number two, it's just not a technical conversation. The buyer wants to know about the business at this point, and who better to tell them than you, the owner. It's a simple meet-and-greet, ask-questions-about-the-business-type of conversation. The technical conversations happen once the buyer is prepared to make an offer, and that’s when we become involved again. 

There's really no need for us to be there at this point. And I've been to hundreds of these meetings earlier in my career, and we can provide the same level of value by being just a phone call away if we are needed. Not to mention that when my expertise was needed before, I usually wasn’t available because I was sitting at a meeting with another buyer. So, again, we've cut that step entirely out of the process.


Jeff: Why do you believe that other brokers do continue to do that, continue to meet with their clients and meet with the buyers?

Jacob: It's simple, one word: “commission.” They need to protect their commission. If they're not at those meetings—and it's happened a lot in the past—the buyer and the seller meet, the buyer asks, "Hey, what are you paying this broker?" Say it is 10%, 50 grand, 80 grand, whatever the cost is, and the conversation goes from there, and they find a way to cut the broker out. So once that has happened to a broker once, the broker then feels the need to be at all of those meetings and to babysit the transaction simply to protect their commission.
 
We model our fees after other professionals like accounting and law firms. We work on a fee basis with a small success fee on the backend of the transaction.

Jeff: And talking now, Jacob, about fees, do you structure your fees the same way? 

Jacob: We model our fees after other professionals like accounting and law firms. We work on a fee basis with a small success fee on the backend of the transaction.


Jeff: So tell us how the fees compare with those of traditional brokers. Are they competitive?

Jacob: Yes, they are. Let me give you a solid example. Say you sold a $500,000 business, you'd pay the average broker 10% to 12%, or $50,000 to $60,000. For us, it would typically range from 1% to 5% of the selling price, or $5,000 to $25,000. And this equals a savings of $25,000 to $55,000 on a half-million-dollar transaction. 


Jeff: Why are Morgan & Westfield’s fees so low?

Jacob: Two reasons. Number one: We're more efficient. Because we're more efficient, we spend less time on each deal. And because we work only by email and phone, we spend less time on each deal. Obviously, when you spend less time, you can charge a lower fee. 

Reason number two: Commission-based brokers need to pad their fees for the 60% to 70% of transactions that don't close. So if you end up selling your business and paying a broker $100,000, about $60,000 to $70,000 of that represents a fee that the broker's charging you as a pad just for the other transactions that they were working on that did not close. So for those two reasons alone, we've been able to significantly lower the fees that we charge our clients.


Jeff: As a business owner and someone who decides to work with you to sell my business, what am I paying for? How are those fees actually parsed out?

Jacob: Again, we are not primarily commission-based. We do have a small success fee on the backend of most deals to motivate us to close the deal. But, we work similar to other professional advisors, like attorneys and accountants. 

Once we meet with an owner, we prepare a proposal, and in that proposal is a list of the services that we recommend and the fees for each of those services. We have another show that will walk you through our proprietary process of selling a business.

Everything that we offer is optional. So the owner can go through that list and say, "You know what, I don't really think that we need a formal business appraisal." And that’s okay. If they want to meet with their attorney or accountant and discuss that, or bring them into the conversation with us, that would be fine as well. So they can help them oversee the process and the fees, and try to make the most intelligent decision possible.


Jeff: Give us some sense right now, if you could, in summary form, how the process works with Morgan & Westfield. So if I were to pick up the phone right now, give you a call, and tell you, "Jacob, I think I'm ready to sell my company. Let's go ahead and let's get started," what happens next?

Jacob: First, we would have a phone meeting with you, the owner. We discuss your objectives, your business, the industry, and dozens of other questions about your business. After that meeting, we would prepare a framework of our recommended steps. And no two transactions or businesses are the same. So every single one of those is customized. Next, you would review the process or framework, discuss it with your advisors if you want to, and then we can tweak the process if necessary.
 
First, we would have a phone meeting with you, the owner. We discuss your objectives, your business, the industry, and dozens of other questions about your business. After that meeting, we would prepare a framework of our recommended steps. And no two transactions or businesses are the same. So every single one of those is customized. Next you would review the process or framework, discuss it with your advisors if you want to, and then we can tweak the process if necessary.

Jeff: What about in those cases where you have a business owner who's not exactly sure if they're ready to sell right now. Is there anything that you're able to do to help them improve their company's value, help them get their business ready to sell?

Jacob: Absolutely. Number one we can do an exit strategy. And that's primarily a qualitative look at the company. We do look at it quantitatively as well. But it's primarily a qualitative review of hundreds of factors that we take into consideration before selling your business. Then we prepare a game plan, that’s typically 50+ pages, of steps you need to take to prepare your business for the sale. 

Secondly, we can value the business. That's helpful because let's say that you want to get 2 million for your business and we only think it's worth 1 million. Obviously, you shouldn't put it on the market now. And again, that is an impartial view of your business because we're not being paid a commission. That offers us the ability to give you an unbiased opinion on the value of your company. 

And then third, if your company isn't worth what you would sell it for, we can help you increase the value of your company.


Jeff: Jacob Orosz, thank you so much for joining us.

Jacob: Thank you, Jeff.


Jeff: And thank you for listening. I’m Jeff Allen.

 
 

Key Takeaways

  • For business buyers, an accountant and CPA are the two most important people one needs in their team to help with buying and validation processes. A broker may not be necessary for someone who is looking to buy a business. 
  • Employees' reactions to the change in ownership of a business may be mixed. Those who provide the business's services, the ones in the field, tend to be less concerned about changes, especially changes in their roles. Others who hold management positions are more prone to worry, as there might be changes in their usual way of doing things. 
  • For a new business owner, building good working relationships with employees is important because doing so will motivate them to provide the best possible service to customers.
  • In buying a business, being thorough in due diligence is paramount, as this will enable the new business owner to run the business more easily and effectively.  Business sellers, in turn, should prepare in advance the data and documents that buyers usually request to save time during due diligence.

Read Full Interview

From our studio in Southern California, with guest experts from across the country and around the world, this is "Deal Talk", brought to you by Morgan & Westfield, nationwide leader in business sales and appraisals. Now, here's your host, Jeff Allen.


Jeff: Hello and welcome back to the web's number one content source for small business owners committed to building a business for eventual sale. Here on "Deal Talk," we share real stories and information from business owners and industry experts that you and all small business owners can use to help you improve your company's value, sell your business successfully, and enjoy what life brings next.

On the program, we have talked in the past to a number of experts who are in the business of helping business owners transition, and in transition help them sell their companies. And they have given us a good taste for what buyers are looking for when they are out prospecting and seriously considering your company. But on today's edition of "Deal Talk," we're going to be speaking with one of the buyer's first-person perspective of what this particular buyer was looking for in the company that he ended up buying, what he has been able to do with his company in a short space of time, and just get a feel for what it is like from a buyer's perspective when they are going through the process of buying a business.

And what we hope to accomplish by doing this is so that obviously business owners can get a clearer understanding of what's going through a buyer's head. Number one, sellers understand what's going through a buyer's head, and number two, if you're considering buying a business yourself, maybe this will give you some sense of what it is like to go through the process before you've had a chance to go through it. That way, maybe you'll be able to form some questions on your own based on this conversation, some things that you should consider asking sellers eventually when you're in the market to buy a business. 

And to help us do all of this stuff today, we are talking with a gentleman who is the new and recent buyer of a business. As a matter of fact a Miracle Method franchisee now, and we've had a couple of folks from Miracle Method join us on this program. His name is Mike Rabinovich. Mike, I want to thank you for your time and welcome you to "Deal Talk," sir. It's good to have you.

Mike: Thank you for having me.


Jeff: Mike, you have purchased a business that we have featured on this program in the past. We spoke with a gentleman who is the former owner, in fact now, of the very location that you own and operate. That gentleman, Dan Ness, we spoke with him some time ago on "Deal Talk" and now you own that same location.

Mike: That's right. 

I think due diligence is extremely important, and both a CPA and a lawyer [are] the two primary people who would help with the process.

Jeff: I was wondering if you can share with us, Mike, what factors made you decide to buy this specific location from Dan Ness and this specific business, Miracle Method?

Mike: The location was pretty simple. We moved here to Portland, and I was looking to settle down, and I was looking for a business in Portland area. I was tied to a location. When I started looking for a business to buy, I initially started looking for manufacturing businesses because that's something that I was more comfortable with. 

But as I was looking, it's a fairly long and complex process looking for a business. There are not very many for sale, and the ones that are for sale I was looking for the right business. And as I was digging through a pile of businesses for sale, this one appeared on my screen. There are a few things that I really liked about it. I thought the buyer was selling it for the right reason. The business was well-established and well-known in the community, and I really like the product. So those are the main things that drove me eventually to purchase the business.


Jeff: How long was the process for you? Once you arrived in Portland, did you start looking for opportunities before you arrived in town, or was it after you arrived in Portland that you wanted to get a lay of the land and see what's available out there before you finally started to zero in on your target?

Mike: It was after I arrived. I came here and then within about three or four months, I started looking. I had a corporate job before that. I have plenty of time to look. I knew I wanted to buy a business, but I knew I could take my time looking for one. And once I started looking, I think it took about six to seven months until I stumbled upon Miracle Method.


Jeff: Mike, for those people who are tuning in for the very first time who may not know what Miracle Method is and what it does, tell us a little bit about your company and what you offer your customers?

Mike: What Miracle Method does is refinish surfaces. A lot of our work is tubs, showers, tile countertops, and recently a more advanced commercial project. We do refinish concrete countertops, concrete floors. But essentially, any hard surfaces, instead of doing a demolition and put new ones in, we'll refinish them and make them look and feel new.


Jeff: And the advantage here to a lot of people and I think many customers are interested in this is the cost savings over demoing an existing countertop or an existing tub and replacing with brand new. You provide a cost-effective option, correct?

Mike: Exactly. Not just cost but also convenience and time. A lot of people don't want to leave for a demolition process of their house or their business. They would rather have it refinished, done in two or three days, especially if the business, as we see it, is very attractive. They want to get back to doing business. They don't want to shut down for two weeks for a complete remodel.


Jeff: Mike, let me ask you. You had a choice. You could have purchased an independently owned business. You ended up though buying an existing franchise instead of an independent business. Why did you decide to select an existing franchise?

Mike: To be honest with you, initially I was a little apprehensive about the franchise. I did not know much about them, but my perception was that a franchise would dictate a lot of what I do and how I do it. And once I started investigating, I actually like the franchise model. And now, I like it even more that I have been a part of it. 

The reason I like it is it gives me a lot of the support network that otherwise I would not have. If I have a question about something, there are other franchisees I can go to and ask them. And somebody always has an answer for me. They help with purchasing. They negotiate national contracts, so I don't have to. There is a lot more negotiating power when you do the franchise. 

From the back-office support, anywhere between constructing a website and doing national promotions, all of those things become a lot easier and more cost-effective when you share the cross, 144 franchisees or however many we have right now.


Jeff: And we've heard similar explanations given from others who also elected to go the franchise route and simply because you have that tremendous support mechanism. You've got it not only in support from, the quality of support you get from corporate but also in the quantity of support, the number of individuals who are there to help you out along the way and in that chain.

When you were ready to get started with the buying process, which professionals did you consult during the process who ended up being most helpful to you?

Mike: I think when I started out, a lot of the background work I've done myself. Once I did not go through a broker directly, I kind of looked online. I contacted a couple of brokers initially, and none of them ended up being exceptionally useful. But when I found this franchise, the main thing was an accountant and a lawyer. Those are the two professionals who helped me go through the steps of the process as well as the validation process.


Jeff: Is that something that you would advise other potential business buyers to do in terms of taking the steps that you did in order to ensure a smooth process?

Mike: Absolutely. I think due diligence is extremely important, and both a CPA and a lawyer, the two primary people who would help with the process.


Jeff: Mike, how long did the process take, the entire buying process?

Mike: It took us about seven months, from the time that I found this business, which was in about April, and we ended up closing at the end of the year, which was more of a convenient thing because the calendar year and fiscal year align. So it was easier. We could probably close a little sooner.

I thought we could do it a little quicker. My expectation was probably three to four months to close, but it took longer. Due diligence took a little longer. Financing took a little longer. Basically, everything took a little longer than I thought it would, but it didn't take too much longer. 


Jeff: Did the people that you worked with and the seller of the company too, were there any concerns or was there anything that they thought could actually contribute to the length of time before things were done, maybe some things that were just entirely out of your control that nobody really expected?

Mike: No, I don't think so. I think everything was... And again, not that it was really delayed. Most things took about as long as they should take. From my perspective, I expected to see a lot more data. I'm a very mathematical person, so I kept asking for more data. 

The previous ownership I think they were running business more by the field than data-driven. And when I asked for data that seemed obvious to me, they just did not have it ready. So it took a little time for them to dig up the data when they could find it. And then it would take for me some more time to analyze what they actually provided.


Jeff: And by the way, Mike, one thing I should probably point to those people who have listened to "Deal Talk" for some time, we've mentioned this before, the fact that it is very common to run into the situation that you yourself found out in working with the previous owner that most business owners do kind of operate that way. 

To say it's “by the seat of your pants” is not accurate, but it is certainly one of those things where you said yourself, “more by feel.” Where the data is not always the most important thing, the analytics of it all. Those types of things oftentimes end up following well down the line, and they present themselves in that due diligence. 

And I'd like to camp out on that for just a second, talking about the due diligence, and we've already touched on that just a little bit. As far as the due diligence process itself, were there any significant challenges that you came across that maybe you didn't necessarily expect and that you feel now, as a business owner yourself, you will be better prepared for, so that when you get ready to sell, whenever that might be, that you'll be able to avoid those issues yourself in your next business transaction?

Mike: There was nothing very difficult, there was nothing critical; otherwise, we probably would not be able to close. But I feel like if our seller took a little longer to dig through data that they have and prepare it... For example, because this is a franchise and there are specific territories that I have to buy, one of the questions that I had, “how much business do you do in each one of your territories?” 

And to answer this question probably took about a month and a half because they did not have the data structured in a way that this was easy to calculate or easy to extract. Now that I own this business, because of the way I maintain my data, I can give you that answer probably within five minutes. 

And to them, it wasn't very important because the way their territories were, they've had it forever, and they probably did not care very much. But as a buyer, I care because I needed to figure out which territory I should assume, which territories I should not assume, does it make sense the way the territories I'm going to structure, do I need to negotiate something with the franchise master. That probably took the longest just because the data wasn't there and it wasn't available.


Jeff: We're talking with Mike Rabinovich. He is the new owner of the Miracle Method franchise in Portland, Oregon. And we're talking to him about his experience in purchasing this company. In fact, from a former "Deal Talk" guest who also ran it very successfully, by the way, Mr. Dan Ness. And we've heard that Dan has quite a name in that business and with that company. He'd been with them for such a long time. And now Mike, of course, doing very well there himself. Our conversation with Mike will continue when "Deal Talk" resumes right after this.

If you'd like to share your knowledge and expertise on any subject related to selling businesses or helping business owners improve the value of their companies, we'd like to talk with you about joining us as a guest on the future edition of "Deal Talk." Interested? Contact our host Jeff Allen directly. Just send a brief email with "I'd like to be a guest" in the subject line. In a brief message, include your name, title, area of specialty, and contact information, and send it to jeff@morganandwestfield.com, that's jeff@morganandwestfield.com. 
Selling your business may be the most important business transaction you'll ever undertake, so don't go it alone. Work with an organization that has made it their business to sell businesses, and that's all they do. Morgan & Westfield at 888-693-7834. At Morgan & Westfield, we know that selling your company is not something you should take lightly. It can be a stressful, difficult, even emotional process. That's why it's important to work with a team whose one and only specialty is selling businesses throughout the United States. And Morgan & Westfield will help you every step of the way, from helping you plan your exit strategy, to preparing a comprehensive appraisal and locating the right buyers. 

Without the right team behind you, you could be leaving money on the table. So don't leave your most important business transaction to chance. Call Morgan & Westfield for a free consultation at 888-693-7834, 888-693-7834, or visit morganandwestfield.com.

If you have any questions about any of the topics you've heard us discuss here on "Deal Talk," or if you would simply like to give us your feedback, we'd love to hear from you, all you have to do is send us an email to dealtalk@morganandwestfield.com. Once again that's dealtalk@morganandwestfield.com. You can also make a phone call and leave us a message at 888-693-7834. Again, that's 888-693-7834 extension 350.

My name is Jeff Allen, pleased to be joined on this edition of "Deal Talk" by Mr. Mike Rabinovich, and he is the owner of the Miracle Method franchise in Portland, Oregon. And we're talking a little bit about his experience buying a business. 

You've heard us talk on this show to a number of experts, people who are in the business of helping individuals buy companies, and they had been able to share with us what goes through a business owner's mind and what they're looking for. Well, now we're getting it from a truly first-person's perspective here, Mike as the business owner, what it was that he went through, what it was that he was thinking, what was important to him. And he's sharing with us the experience.

Right now, Mike, what I'd like to do is I'd really be interested in talking to you about the people, the human element, the folks in the background who do a lot of the work for the company. Those are the folks who get out into the trucks and the cars. They go out in their vehicles, they go out into the field, they do the work. You obviously had a chance to gauge the employees’ reactions when they found out that you were the new owner of the business. Just give us a glimpse into what that was like from your eyes, seeing their reactions, what those reactions were, and how you were able to deal with them.

Mike: I would say the reaction was definitely mixed. I would say from the technicians' perspective, the guys who actually go and do the work, they probably have a little bit less of a reaction because they knew that they were the ones delivering work, and there would probably not be a huge change for them.

Office personnel knew there would be a big change for them, and some of them were excited, and some of them were scared. So that was essentially the mix of people. We had a general manager who was here for, I think, 25 or 27 years with the previous owner, and she was probably the one that was the most nervous about changes because she had just been used to running the business in a specific way. The rest of the people in the office seemed more excited about the changes than were nervous about them.


Jeff: And that obviously makes you feel, I think and correct me if I'm wrong, Mike, a little bit more comfortable because you have to do a little bit less, say, coddling or maybe you don't need to provide as much assurance as some individuals might where they have an environment where all of the employees, all the staff members are really concerned and really feel badly about the changes that are taking place. And let's face it, sometimes you hear some of those stories. There is such a change in culture from one owner to the next. But here you are, you walk into a situation where you were able to take and you were able to bring people into the fold and make them feel comfortable.

Let me ask you then now, Mike, we've had a chance to go through, the business has changed hands, you've been at it now for several months and with this particular location. Let's find out how you're performing and how you're doing based on what you've been able to see so far from the numbers and from the business that you've been able to bring in. How is Miracle Method Portland performing now?

Mike: We've been doing extremely well. It's been just over a year, in fact, it's been 13 months since I bought it. Last year, our revenue increased by 47% compared with the year before. It was significant. Our net has basically doubled. 


Jeff: Wow, unbelievable. And so you've really got to be feeling tremendously confident about your operation, and the corporate office has got to be pleased with how everything's going as well.

Mike: Oh yeah, absolutely. I'm very happy with the way things worked out. It exceeded my expectations. I expected we would grow, and I expected we would find some cost savings. It just ended up being much better than I even projected.

When you own a small business, your employees or your team members really look up to you, and you need to be able to connect to them. You need to make sure that they're comfortable with you. That's the only way that they're going to perform well. That's the only way that they're going to give their best to work on your business.

Jeff: Do you essentially have the same number of people, the same number of personnel on board now that you had when you first started? Or have you been able to grow the team at all to this point, or is that still in the works?

Mike: We grew the team a little bit. We added a few people. When I took over, I have 13 employees and we're up to 17 right now. And we're always hiring. As we are growing, and I know this year I'm projecting another 20% to 25% growth. I need to hire more employees, both office employees as well as technicians.


Jeff: This is outstanding. Congratulations so far on the early returns. It just sounds like everything has been working very, very favorably for you, Mike Rabinovich. Would you consider that by now, it's been about 13 months, you say. Is this still a transition period for the business, or right now the business has its legs underneath it, you're in full control, and you consider this pretty much in its new evolutionary phase, and the transition period is all entirely over with?

Mike: I don't think the transition period is over yet. I think we have picked a lot of low-hanging fruits in the way of business improvement, but it's not fully running the way I like it to run. And there are quite a few changes that are forthcoming that will alter the business pretty significantly. So probably by the end of this year is when I would consider the transition phase complete.


Jeff: What are your goals, what are your objectives, what kinds of improvements are you looking to make?

Mike: Both from a sales perspective, I'm looking at essentially more growth and specifically targeting a few of the sectors that have been underdeveloped, specifically hospitals is one place where we haven't done as much work as we should, and so is universities. 

Then from a quality perspective, we're looking to improve our quality, which has been really good compared to our competition, but there are a few changes that need to be made operationally to make it even better. And as well as software, we are looking to replace our existing software system in the next couple of months. And that will give us quite a few tools for customer relationship management as well as cloud to track in as well as purchasing.


Jeff: Mike Rabinovich is the owner of the Portland area franchise of Miracle Method. Is there anything that you can offer in the form of advice to either business sellers or business buyers that would allow them with their transactions, no matter what kind of business or industries that they're involved in, to help them make the transition process go more smoothly? You've had a chance to participate in it. You've lived it. Is there anything at all that people can do to ensure that the transition moves as smoothly as it possibly can to help both the buyer and seller reach their goals?

Mike: I would say spend as much time as you need for due diligence. Bring in people who you trust to help you review documents, review numbers, review contracts, talk to customers, talk to suppliers. Spend time on that because the more time you spend doing that, the easier it is going to be to run the business once you actually take it over.


Jeff: Mike, I'd also like to ask you too, if you could, because you're such a down-to-earth-sounding guy. We haven't met face to face, but I can tell just by chatting with you that you're a pretty reasonable guy to deal with and easygoing as it can be for a business owner to be that way. 

Are there any characteristics or traits that you can think of, or any particular qualities in general terms, that a business buyer should have when they get ready to engage in the process of buying their own business? Maybe it's for the first time, as a matter of fact. What should business owners have inside them to help them get through the process smoothly and get to where they want to go?

Mike: I think a big part, from a personality perspective, is the ability to connect with your employees. Most business buyers, so this is their first business, they probably have been managers or organizational leaders of some sort before, but they were never the only ones making decisions. When you own a small business, your employees or your team members really look up to you, and you need to be able to connect to them. You need to make sure that they're comfortable with you. That's the only way that they're going to perform well. That's the only way that they're going to give their best to work on your business.


Jeff: This has just been an absolutely fascinating conversation. I've really enjoyed it a lot, Mike, and I appreciate you taking the time. And what I'd like to do now is offer you the opportunity to provide your contact information for those people who obviously would like to do some business with you and would like you to come on out and take a look at what they have, to find out about how Miracle Method can help resurface and bring back to life maybe a counter top, or a tub, or any other surfaces, maybe floor or whatever they have in their business or their residence, number one. 

And number two, if you don't mind also sharing your number for those business owners or those people who are looking to buy a business who might want to just tickle your brain a little bit to get some information from you, some of your input in terms of expertise that you now have as a business buyer to help them in case they might be looking for tips on how to buy a business themselves.

Mike: Absolutely. They can always call us at 503-256-3405. I'm mostly in the office, and if I'm not, the office staff will always relay a message to me. Or they can email at portland@miraclemethod.com.


Jeff: Very good. Again, Mike Rabinovich, I appreciate all of your time, really a great story, and I thank you so much for taking time out of your busy day today to talk with us a little bit about your experience and just share your expertise as a business buyer. And I do wish you much success with your location there in Miracle Method in Portland and continued success.

Mike: Thank you so much, Jeff. Thank you for having me.


Jeff: That's Mike Rabinovich. He is the owner/operator of Miracle Method, the franchise located in Portland, Oregon. Again, I hope that you enjoyed the conversation. It really is nice to talk to the business owners themselves, to learn about what it was that they went through, what they were thinking, and the process and how they saw it, and now how they're getting along and how their companies are doing. 

And speaking of how companies are doing, let us know how we're doing. Again, we'd love to hear from you and hear from you more often. Send us comments, compliments, and criticisms to dealtalk@morganandwestfield.com. 

"Deal Talk" is brought to you by Morgan & Westfield, nationwide leader in business sales and appraisals. Learn more at morganandwestfield.com or by calling 888-693-7834. I'm Jeff Allen, again, thanks so much for listening. Here's to your success.

While we take reasonable care to select recognized experts for our podcasts, please note that each podcast presents the independent opinions of such experts only and not of Morgan & Westfield. We make no warranty, guarantee, or representation as to the accuracy or sufficiency of the information provided. Any reliance on the podcast information is at your own risk. The podcast is for general information only and cannot be considered professional advice.

Key Takeaways

  • There are three types of intellectual property: patents, copyrights, trademarks and trade secrets.
  • Trademarks are different from patents and copyrights; you don't own a trademark — you own the right to use it in connection with your goods and services. 
  • Primary areas that business owners often overlook include tribal knowledge, digital assets and social media accounts.
  • To do determine the value of your intellectual property, you look at the market, how that intellectual property fits into your business and how you monetize your intellectual property.

Read Full Interview

Jeff: Protecting your intellectual property rights. If you want to know why this is important as it pertains to the sale of your company and what steps you need to take to get started, you've come to the right place.

From our studio in Southern California, with guest experts from across the country and around the world, this is "Deal Talk," brought to you by Morgan & Westfield, nationwide leader in business sales and appraisals. Now, here's your host, Jeff Allen.


Jeff: Hello and welcome back to the web's number one content source for small business owners committed to building a business for eventual sale. Here on "Deal Talk" it's our mission to provide information and guidance from our vast, growing list of trusted experts worldwide that you and all small business owners can use to help you build your bottom line and improve your company's value. And I think our growing list of trusted experts worldwide has probably grown to about I think 125 experts. We're so glad that they've made us such an important part of what they do. We thank them so much.

Most of us know what intellectual property is. And we all have some of it ourselves. We all own some as part of our businesses. Some of us own way more than others. But not all of us may know exactly how much we have, or in some cases what it is, or why it's so critical, for that matter, to protect our rights to that property. 

If you're listening today to gain a fuller understanding of what your intellectual property rights are and why it's important to protect them when the value of your business is at stake, this show is for you. And to help us kind of understand the ins and outs and why this discussion of intellectual property and the protection of your IP rights is so important is Beverly Berneman, Intellectual Property Partner at Golan & Christie, LLP in Chicago. Beverly, welcome to "Deal Talk," so good to have you.

Beverly: Thank you. Thanks for asking me to be here.


Jeff: For those owners, Beverly, who are considering selling their companies at some point down the line, it doesn't necessarily matter when. Why is it necessary to take particular care to see that your intellectual assets are protected?

Beverly: In this day and age IP assets, intellectual property assets, tend to be the most valuable assets of a business. Let me give you some examples from my own clients. I have a manufacturing client who has unique technology. That technology allows it to stay ahead of its competitor. 

I have a client who's a microbrewery and they draw customers with their catchy names and their proprietary recipes that they keep secret. And another one, I have an author who wrote a book and she's now being courted by a producer who wants to adapt it for a stage play. In each of these cases it's the intellectual property that's the foundation of the business. 


Jeff: I think it's really important here that some of us can kind of see where you're going with this, and you kind of try to crystallize I think for us and very well in some of those examples. What some ideas or examples of intellectual property are. And some of us may already know and have an understanding of the basics here, understanding that you're not a valuation consultant, Beverly. How much might our intellectual property contribute to the value of our business?

Beverly: Value is really a combination of things. And as you pointed out I'm not a valuation expert, so I don't go in and tell you how much it's worth. But I can tell you that in terms of what it means to your business, in terms of that value first you look at the market. Is there a market for your great idea, for your invention, for your service. Because if customers aren't going to call, if nobody wants your services, your IP is not going to have any value.

The second is to look at how that intellectual property Fits into your business. You have to know what place it has, otherwise it's not going to have value. And the third is how you monetize your intellectual property. And for this I think I can come up with an example that will really show how this works. 

If you have a franchise, say your McDonald's, you're licensing trademarks, you're licensing recipes, you're licensing the process of how you run the restaurant, how it looks, and so on and so forth. And in return you receive royalties and licensees. So what McDonald's has done is taken all of its intellectual property and monetized it in terms of licensees. So you take all of these things and that's what creates the value.

Protecting your intellectual property assets should not be a matter of dollars and cents, because it's not cost-effective to allow your intellectual property assets to go unprotected.

Jeff: Talking with Beverly Berneman, she's the Intellectual Property Partner at Golan & Christie, LLP in Chicago. I'm so glad that she's managed to kind of carve out some time during her day to talk to us about intellectual property rights. When we talk about rights, Beverly, what are those rights actually? What does that mean to us? Is it different for everyone in terms of the rights that we have to our intellectual property? What kind of rights do we actually have?

Beverly: That's a really good question, and it can be confusing. Let me approach this by type of intellectual property. Let's first talk about patents. Patents are a right to exclude. So it's really more like a monopoly than a property right that we might be used to. You can own real estate, you can own a car, but you don't really own a patent. All you do is own the right to exclude others from using it. So let me give you an example.

If I patent the cure for say the Zika virus. I don't actually have to use it, but I can exclude other people from using it. The patent process warning here or caveat is it can be very time- and money-consuming, so we don't enter into it lightly. For instance, fees can, I'm not going to try to quote fees for other attorneys, but you could expect to spend anywhere from $10,000 to $150,000 for a patent. And it can take anywhere from three to five years.

By the way, speaking of chores, Jonas Salk refused to patent the cure for polio. He wanted to make sure it was available to everyone who needed it. Sometimes the altruistic business model can come into play as well. 

Going on to copyrights, copyrights are rights in the authorship of a work that sticks to an intangible means of expression. And copyrights come with what we call a bundle of rights or six primary rights. That's the right to reproduce the work, the right to prepare derivative works, the right to distribute copies of the work. In the case of some types of literary, musical, or dramatic works, the right to create audiovisual works, the right to perform the work. And in the case of sound recording, the right to perform the works digitally. 

All of these rights are exclusive to the author and these are more akin to the kind of property rights that we're used to. And one of the interesting things about copyrights is the owner can actually separate up the rights. So the owner of a copyright can license the right to copy and distribute the work to one licensee and the right to perform the work to a different licensee.

Trademarks, Jeff, you made a really good point about the “Golden Arches,” and the trademark, and the fact that it's a source or product identifier. Trademarks again are different from patents and copyrights because they are really a creature of consumer protection. You don't own a trademark, you own the right to use it in connection with your goods or services. 

Sometimes I get a call from a potential client saying, "I got the slogan I really like and I want to trademark it." And then I'll ask them what product or service is it connected with and they'll say, "Well, no product or service. I just like it and I want it to be mine." Trademarks don't work that way. You also can't adopt a trademark that's going to cause confusion as to the source of sponsorship of your goods or services.

And the fourth primary type of intellectual property are trade secrets. That's something that's not generally known or easily ascertainable, and that it is such a reasonable measure of secrecy. Trade secrets are sort of a late comer to the IP world. Patents and copyrights are actually covered in our Constitution. Trademarks have been around for hundreds of years, although the statute that protects them here in the U.S. wasn't passed until the 1940s, that's the Lanham Act. But trade secrets sort of came into their own in the mid- to late-20th century. And they are covered usually by state law. 

However, as of May of this year the Defend Trade Secrets Act was passed. Now there's a federal cause of action for protecting trade secrets. To give you an idea of what trade secrets are, I'm going to name some famous ones. The Coca-Cola recipe is one, although people say it's not really a protected trade secret. However, recently two employees of Coca-Cola tried to sell the formula to Pepsi, and you got to give Pepsi credit, they called Coke and said, "Guess what, somebody's trying to sell us your trade secret."

Some of the interesting ones are Google's proprietary search algorithm, WD40, some of my favorite comfort food: Mrs. Fields' Chocolate Chip Cookie recipe and the Twinkies recipe.


Jeff: That's actually some of my favorite comfort foods as well, Beverly. Well done.

Beverly: And my favorite one, because I didn't know those until I started doing research into trade secrets, The New York Times Best Seller List, the methodology for figuring out which are their best sellers for their list, that's a trade secret. Nobody knows exactly how they do that except for The New York Times.


Jeff: So what you're trying to say is that maybe The New York Times Best Seller List is actually not a list of best sellers based on volumes sold or number of books sold, but they could be best sellers, in fact, after The New York Times puts the fact that they are on The New York Times Best Seller List and make that public. Then the sales actually start to shoot up. I see how that works.

Beverly: That could be. And there could also be something else in there, evaluating who buys the book, how many libraries buy the book. There could be all kinds of variables that they use to create the list.


Jeff: That's why it's a trade secret. Exactly.

You can own real estate, you can own a car, but you don't really own a patent. All you do is own the right to exclude others from using it.

Beverly: Yeah, that's why it's a trade secret. Keep in mind that all of these types of protection I talked about are for the U.S. only. If your business has an international component there are ways to get cross boarder protection. But there's no system of protection that's going to give you global coverage.


Jeff: I'm just kind of wondering, many business owners have a trademark, or a logo perhaps, or a service mark that they have not registered, and we know this by the little R with a circle around it. It's kind of something that you have to do through a federal office. But how much protection if any do we have, Beverly, as business owners if we don't in fact register that trademark with the federal government?

Beverly: Certainly there are some famous trademarks that have not been federally registered. I think Scrabble is one. You just see a TM on there. But that just says that you're claiming common law rights. And to me this is sort of a last resort if you don't think you can get registration. Should someone begin using a confusingly similar mark and thereby confusing your customers or your clients, your remedies are going to be limited to adjunctive release and national damages. 

That's why wherever possible I recommend federally registering your trademark. Not only does it become  proof of your rights, it gives you an arsenal of remedies that you wouldn't have otherwise. So you'll get your adjunctive relief in damages but you can also get the defendant's profits. And in some cases you can even get your attorney's fees. So that's very valuable.

And there's one other advantage, and that is if you have registered your mark for more than five years, you can have the mark declared incontestable. And what that means is it limits a defendant's ability to challenge your trademark. For instance, somebody's using a confusingly similar trademark. You sue them and they say, "Your mark is merely descriptive so it shouldn't have been registered in the first place." If it is an incontestable trademark the defendant does not have that defense any longer. So that can be really, really valuable.


Jeff: What is that contingent on? You said five years.

Beverly: Right. You still have to be using it because, as I said, a trademark is based on you. There is a way to protect a trademark that is not already in use, but say you're in product development and you've come up with a very catchy logo design, and you're afraid your competitors knew about this logo design. They might to try to jump in and take it away from you, try to register it out from under you. While you're in development you can file something with the USPTO that's called an Intent to Use Application. And basically it's exactly what it sounds like, I intend to use this at some point in the future within three years, but I'm not ready to use it yet. I want to have that placeholder for it. 

So the trademark is going to go through the same vetting process with an examining attorney at the USPTO that a U.S.-based application would. But then they wait for you to file a statement of use. And then once you file the statement of use it relates back to your original date of application. So you've gotten priority in the use of that logo design and you've protected it. For the most part, however, getting your protection you have to use the mark. If you don't use it for three or more years, the law presumes that you've abandoned it. There are some exceptions and there are ways to prove to get around that. But that is a presumption and you got to be careful of it. 


Jeff: Fascinating stuff and very important. Beverly Berneman is joining us and she is an Intellectual Property Partner at Golan & Christie, LLP in Chicago. We're talking about intellectual property rights and really why it is so important that you get your arms around your intellectual property. You have an understanding of what it is, all that you own, and what you need to do to protect it, to protect yourself, protect your business, and protect your business's value. Why is that important? Well, because when you go on to sell your business, obviously, you want to get as much as you can out of it. But if there are any issues with your property, intellectual property that is, you could be leaving a lot of money on the table, and you could actually be costing yourself quite a bit of money down the line.

My name is Jeff Allen. Beverly Berneman will be back to join me once again as we continue our discussion on intellectual property rights when "Deal Talk" continues right after this.

If you'd like to share your knowledge and expertise on any subject related to selling businesses or helping business owners improve the value of their companies, we'd like to talk with you about joining us as a guest on a future edition of "Deal Talk." Interested? Contact our host Jeff Allen directly. Just send a brief email with "I'd like to be a guest" in the subject line. In a brief message include your name, title, area of specialty, and contact information, and send it to jeff@morganandwestfield.com, that's jeff@morganandwestfield.com


Selling your business may be the most important business transaction you'll ever undertake, so don't go it alone. Work with an organization that has made it their business to sell businesses and that's all they do. Morgan & Westfield at 888-693-7834. At Morgan & Westfield we know that selling your company is not something you should take lightly. It can be a stressful, difficult, even emotional process. That's why it's important to work with a team whose one and only specialty is selling businesses throughout the United States. And Morgan & Westfield will help you every step of the way, from helping you plan your exit strategy, to preparing a comprehensive appraisal, and locating the right buyers. 

Without the right team behind you, you could be leaving money on the table. So don't leave your most important business transaction to chance. Call Morgan & Westfield for a free consultation at 888-693-7834, 888-693-7834, or visit morganandwestfield.com.


Are you a professional adviser, accountant, attorney, or a wealth manager, or do you provide other professional services? Contact us today to see how our reliance program can help you increase your firm's revenues. Call Morgan & Westfield at 888-693-7834. That's 888-693-7834.


Jeff: Don't forget, you can listen to "Deal Talk" on any one of four channels. You can hear it on iTunes, Stitcher and Libsyn. Stitcher and Libsyn, two of the largest independent podcast hosting sites in the world. But by listening to "Deal Talk" on morganandwestfield.com's podcasting channel, the "Deal Talk" channel, you can also receive the full show notes right as you listen. And you can even download those and save them to your device so that you can review them later on. Once again, the show notes available on the "Deal Talk" podcast page at morganandwestfield.com.

My name is Jeff Allen with special guest Beverly Berneman, our expert today talking to us about the importance of protecting your intellectual property rights with your company. Beverly, we talked about some examples of intellectual property, many of them common and that we have seen throughout the course of our daily existence as consumers. But as business owners, give us some ideas of some other types of intellectual property that we may in fact own, or maybe we haven't given much thought to with respect to our own business.

Beverly: I want to go back to trade secrets, because I think that that's sort of an unsung hero of intellectual property. Just a short story, a client of mine long ago, a long-time client. When I first started with them I went for a site visit to their plant. They took me on a tour, they showed me their inventory of patents and trademarks. And what I realized as I was walking through the plant was that a lot of what my tour guide was telling me was about their tribal knowledge and their proprietary technology that didn't rise to the level of a patent. 

And then when I talked to the CFO and the CEO when I debriefed after my tour I said, "You guys have a lot trade secrets here. We’ve got to properly protect them." They were surprised. And what we did was we had a contest and let employees of the company identify trade secrets. And last count we came up with 28 separate secrets that are now being properly protected. You may not know that your tribal knowledge is protectable, is proprietary. And so that's an area that I think really every company, every organization should be looking at. 

Second is the digital assets, such as websites, how they look and feel. They can be protected perhaps as trade trust. And domain names, very important in terms of how they're properly protected. A third is your social media. Virtually every merger and acquisitions case matter that I worked on in the last several years we've had to look at and transfer social media accounts.

These are three primary areas that I think people don't often look at and understand that they have value and rights, and should pay attention to them.


Jeff: I appreciate you bringing those things up, very, very important. Now, I'm just kind of wondering then, let's say I am preparing to sell my business and I'm just kind of wondering if there is any difference in the way my company's intellectual property rights should be protected when considering an asset sale versus, for example, a stock sale.

Beverly: The most important issue is proper due diligence, always. You have to know who owns the intellectual property. For instance, I just recently had a situation. A company was selling its assets. When I did the due diligence I found out that the domain names were actually owned by an individual who used to work for the company. That individual was summarily fired years before for reasons that you would probably imagine, and was long gone. But now we have to trace that person down and we had to try to get past the bad blood to get an assignment from that person, and it wasn't pretty. That's an area where due diligence, it could've cost the company the whole sale if the domain name didn't go along with the company.

Another thing to look at is are your federal registrations up to date? Because both patents and trademarks require regular filings to maintain their status. Another thing to look at is are proper measures and secrecy in place for your trade secrets? Again, when somebody knows about your trade secret it's not a trade secret anymore and it can lose value, and it could taint the deal. Whether it's an asset sale, or a stock purchase, or venture capital, any of these sorts of things, it could be a real problem. 

And the final thing is to make sure that there are no liens on the assets. There are different ways to attach liens to different types of intellectual property, so the due diligence in this area you really need to have somebody who understands how they all work in order to make sure that there are no liens.


Jeff: And I would imagine that, Beverly, you would probably agree and state with a certain degree of authority on this that you really do have to contact an attorney who likely does specialize in this somehow, someway, or an attorney if you've got your own business attorney already and they may not necessarily specialize in this area, that you need to somehow try to find out if they can refer you to one. Is that correct?

Beverly: That's correct. Because the intellectual property practice has some really unique aspects. One of my partners always says that I make up the rules. Every time he comes and asks me a question it sounds like I'm making up the rules. But his practice doesn't touch this area, so he doesn't quite understand it, but he knows enough to know when his client has an intellectual property problem that I'm the one that should be talking to the client. As you could see from the things that we've been talking about, all of these different rules and how to navigate the protections and the proper registrations, and how to navigate the due diligence, all of those things, an intellectual expert … well, maybe not an expert but an attorney whose practice is emphasized in intellectual property is the proper person to talk to.


Jeff: Would that individual also be the first person that you would recommend that we get in touch with in order to simply identify all of the intellectual assets that we might have so that we don't forget any? Or is that something that we're capable of doing on our own before we call the attorney?

Beverly: An attorney can really hold your hand and walk you through the process of due diligence. When I was talking about due diligence I don't go into the client's headquarters or plant and do the leg work myself, but I ask the right questions and that can be done in-house, that actual leg work to answer my questions. 

But I as an intellectual property attorney, I know how to determine whether or not this particular asset is properly protected, whether there are any liens on it, whether you've gotten the assignments from the inventors, which is really important in patents, and all of those things. You really need an intellectual property attorney to help you. 


Jeff: In terms of cost on this, and I know it's different for every situation, I understand that, but it seems to me that maybe some business owners don't want to get involved with attorneys in protecting their intellectual property, because, number one, they don't have a clear grasp of what kind of intellectual property they own. Number two, they're not aware of their intellectual property rights. And number three, when they hear the word attorney they're thinking a bunch of money. Not only do I have to pay my attorney but I'm also going to have to pay for whatever kinds of filings are involved here.

In terms of cost and time that it takes to protect ourselves once we have a pretty clear understanding of all of the intellectual assets that we own, what are we looking at here? Are we looking at potentially hundreds of thousands of dollars, or is it something that is probably a little bit more manageable and somewhere kind of in between where we think we might be, and how much we'd love to pay if we knew that we could get away with it?

Beverly: There's two sides to this coin here. The first is protecting your intellectual property assets should not be a matter of dollars and cents because it's not cost-effective to allow your intellectual property assets to go unprotected.


Jeff: Boy, isn't that for sure. Yeah.

Wherever possible I recommend federally registering your trademark. Not only does it become proof of your rights, it gives you an arsenal of remedies that you wouldn't have otherwise.

Beverly: It's way more expensive to not protect it than it is to protect it. For instance, again just from my own practice, I had a client who was basically a software architect and he went into business with three other people. So there's four people altogether. He was the brains. He was the one who created the software and the other three were the money people. And they went into it without any attorneys helping them create their LLC and their operating agreement. And when they had a falling out, my client wanted to leave and they wanted to stop him from taking the software with him. 

And so they brought suit against him and we were in litigation about who owned the intellectual property as well as what was the deal, how people were going to get paid, and so on and so forth. It really affected the business because they were so focused on fighting with each other that they actually couldn't operate the business at all. 

And in the end the litigation costs were way higher than they would've been had they contacted counsel at the beginning, negotiated an operating agreement, because this was a limited liability company, negotiated an operating agreement that made it clear who owned what and how much people were entitled to. And in the end the business had to shut down and everybody had to go their separate ways.

There's a good example of how if it crossed your company, whereas if you had just started at the beginning with counsel these issues can come up but at least you have a road map for how to deal with them. And I should let you know, it's really important to me that my clients protect their IPSS, so I'm very flexible on my fee arrangements with my clients. I try to really help them with affording me. Because I don't want to be a drain on their resources; I want to help build their resources. And I know that there's a lot of other attorneys out there who are just like me.


Jeff: Beverly, I can't thank you enough for your candidness and really sharing that horror story in real life because it actually did happen and it's just an example right there that had certain conditions been met had they protected their intellectual property rights in the beginning. Maybe those friendships wouldn't have dissolved, maybe the company might still be in business. And look at all of the money, and all of the promise, and all the dreams that were broken that went along with that, and it's just not worth it. 

For so many of us our business is such an important part of our lives, it's almost like an appendage, it's part of us. It just doesn't make sense to take and put intellectual property rights and your protection of those rights on the back burner thinking that you're covered, thinking that nothing will happen. Because as soon as you develop that weak mindset stuff happens and it can really impact not just your ability to sell your company but your ability to continue to stay in business at all. And I want to thank you so much for all of your time today.

If someone should in our audience be interested in contacting you about their particular situation about looking into their intellectual property rights and helping them protect those rights, how can they contact you?

Beverly: They contact me by email. That's the best way, at baberneman@golanchristie.com. I'm always happy to field questions. Of course I can't give advice until I'm retained, but I can certainly field questions. I also have a weekly blog called IP News for Business. It's accessible under the knowledge tab on the Golan & Christie website. And you can follow me on Twitter @IPBevB.


Jeff: Beverly, just a wealth of information and so good to talk to you. It's been very, very pleasant. We sure do appreciate your time. Thank you so much for joining us today on "Deal Talk." 

Beverly: And thank you for having me.


Jeff: That's Beverly Berneman. There she goes. She is Intellectual Property Partner, Golan & Christie, LLP in Chicago, such a treat to have join us and really just a fount of information. I hope you got a lot out of it.

Let us know how we're doing, won't you? We'd love to hear more from you. Send us your comments, compliments and, yes, you can even send your criticisms to us at dealtalk@morganandwestfield.com. "Deal Talk" is brought to you by Morgan & Westfield, a nationwide leader in business sales and appraisals. Learn more at morganandwestfield.com. That's morganandwestfield.com, or by calling 888-693-7834. I'm Jeff Allen, until next time, here's to your success.

While we take reasonable care to select recognized experts for our podcasts please note that each podcast presents the independent opinions of such experts only and not of Morgan & Westfield. We make no warranty, guarantee, or representation as to the accuracy or sufficiency of the information provided. Any reliance on the podcast information is at your own risk. The podcast is for general information only and cannot be considered professional advice.

Key Takeaways

  • With the financial collapse, small business owners have a more difficult time getting a loan from a bank, which makes alternative methods for lending necessary.
  • The top alternative for lending is ABL lending, asset-based lending, which uses the business’s inventory as collateral.
  • Factoring allows business owners to solve their cash flow problems and regain some traction so they can move forward and grow the business while waiting for receipts from customers to come in. 
  • When considering alternative sources of lending, a business owner should have thorough knowledge of stand-alone accounts receivable and purchase order funding in order to determine if factoring would be a good fit for their particular cash flow issues.  

Read Full Interview

Jeff: Still struggling with cash flow problems? Well, if you're looking for different ideas on how to deal with this global accounting epidemic, that's what I'd like to call it, then you've come to the right place.
 
From our studio in Southern California, with guest experts from across the country and around the world, this is "Deal Talk," brought to you by Morgan & Westfield, nationwide leader in business sales and appraisals. Now, here's your host, Jeff Allen.
 
Jeff: Hello and welcome to the web's number one content source for small business owners committed to building a business for eventual sale. Here on "Deal Talk" it's our mission to provide information and guidance from our growing list of trusted experts that you and all small business owners can use to help you build your bottom line and improve your company's value.
 
Cash flow, we've talked about it on the program before. And cash flow as you know is something that you and many business owners, in fact, I would say probably most small business owners would have to deal with at some point in time. Today on the program I have somebody who is going to provide us with some different ideas on how to deal with your cash flow issues. And these are some things that we haven't talked about in the past. 
 
And to help us do that, I'd like to welcome in a gentleman by the name of Mr. Donald Jacobs. He is Senior Vice President of Business Development at Midland American Capital. Don Jacobs, welcome to the program. It's nice to have you on "Deal Talk," sir.
 
Donald: Thank you, Jeff. 
 

The easiest choice and the most traditional way for a small business to get capital is to go to a bank. The problem is that banks have gone through a dramatic change in the last 12 years since the financial collapse, and they don't necessarily have the ability at the present time to lend out as much money as they previously had in the past.


Jeff: Don, when I contacted you about joining us on this program, we spoke about ways to deal with cash flow that are kind of unique. But these, according to what you've told me, are not necessarily new ideas. Before we get into it I was wondering if you might be able to take just a minute though to kind of talk a little bit about yourself, who you are, and where Midland America Capital is, and what you guys do over there.
 
Donald: Midland Capital handles United States and Canada. We are a factoring alternative lending company, which means that we offer two core services. We offer accounts receivable funding. And then we do a combined purchase order/supplier funding, combined with accounts receivable so that if you needed help getting goods from China or across the street to pay for the supply for an order that you're fulfilling, we will be able to pay for 100% of those goods.
 


Jeff: We're going to get into the nitty gritty on these here in just a moment. But first of all I kind of want to hear from you, Don. Many businesses we've talked about on the program before deal with cash flow issues, regular basis, but business owners may decide not to seek funding through bank loans, etc. Instead they might opt to drive improved sales, get out there and pound the pavement. We just got to generate more sales, generate more revenue rather than incur more debt. Is this a sound approach to take, and if not why not?
 
Donald: In most situations what happens is a small business owner needs to grow his business and he needs capital to do it. So he has a relationship with the bank. He has a DDA account or a business checking account with the bank. And he goes to his business officer and he says, "Hey, I would like to get a loan." 
 
And the bank after the financial crisis has gone through some major changes where in the past he may have been able to get a $50,000, $100,000, $300,000 line of credit, or a term loan that he could use as collateral to grow his business. 
 
But with the world changing so dramatically after the World Trade Center and the financial collapse, banks have a very difficult time lending money now. You have reserved requirements have increased, their compliance requirements have increased, and it's very difficult for them to lend out money. So it may be that the business owner needed $100,000 and the bank is willing to give them $25,000. The $25,000 may not be enough for him to grow his business properly.
 


Jeff: I was just going to say, Don, I don't mean to jump in here and interrupt. But it would seem to me that this would be one of those things that for small business owners in particular this would be a particularly difficult problem for them to deal with when it comes to changed qualification procedures and processes in place with the banks, making it more difficult for them to get money. Would that be true?
 
Donald: What has happened is exactly that, Jeff. And that banks used to lend out X amount of money for loans. And they basically chop that into half so the amount of money that the bank is lending out is half the amount that they gave previous to the financial collapse. 
 
So, alternative lenders have come up to step in and say hey, the fact that it's not going to lend you money there are other alternatives out there so that you can get money to grow your business. The problem is is that a lot of small business owners aren't aware of the many alternatives that are out there.
 


Jeff: Let's talk about the different sources of funding that are available in most cases right now to most people. And all they would have to do is go to Google or make a couple of calls to their accountant, or maybe even possibly an attorney or another business consultant that they might know and they'd be turned on to all these different sources and maybe some key contacts at these sources. 
 
Let's talk about those first of all. If you will kind of a ranking order or a hierarchy, or maybe even call it a pecking order of those types of institutions or firms that provide capital. And maybe you could kind of tell us where they all kind of line up. 
 
Donald: The path of least resistance that you see for most business owners is to go to the local bank and see if they can get a business loan. So a bank would look at their financials, would look at the FICO Score for the business, the FICO Score of their owner. And based on historical records, the last two years the profitability of the company, they would decide whether that should be green-lighted or was a loan they couldn't do.
 
They couldn't go to the bank. There are SBA programs which is a hybrid loan. So 50% of it is a government loan, and 50% of it is through the bank. So there are certain requirements that are structured in order for it to qualify as an SBA loan. And then there are certain economic loans that are out there, but most of the economic development loans are geared up and how many people that you would hire. And a lot of it is geared up to real estate type loans.
 
So taking that type of loan structure aside then you would get into alternative lending. The top of the hierarchy for alternative lending is ABL Lending, asset-based lending. Asset-based lending is using your inventory as collateral so that if something were to happen they have your inventory that they could take to compensate and reduce the risk so they wouldn't take a total hit if the loan went bad.
 
Then there's factoring. Factoring uses the invoice as collateral. So it's a different kind of structure than the ABL lending, which takes the inventory. Then there would be ACH lending, which is automatic clearing house where they reduce their risk by taking the money out of your account automatically on a daily basis. It's electronically transferred so you make the payments on a daily basis as long as your account is operating. 
 
And then the last choice would be hard money. And hard money in many situations they would say, "Hey, make 12 payments, make 12 checks out, sign them, and pre-date them per month, and I'm going to cash those checks. If one of those checks bounce, you're going to be hearing from my lawyer." So those are basically all the terms that are out there.
 


Jeff: Donald Jacobs is Senior Vice President of Business Development at Midland American Capital. You're hearing his conversation with me, Jeff Allen, right here on "Deal Talk." We're talking about alternative ways to deal with the cash flow issue that you might be facing. 
 
Donald, in all of those scenarios or with all of those choices we just talked about, the traditional and the alternative choices, where do most business owners do you think tend to gravitate? Or to what do they gravitate toward to help them of all of those choices that we just talked about?
 
Donald: The easiest choice and the most traditional way for a small business to get capital is to go to a bank. The problem is that banks have gone through a dramatic change in the last 12 years since the financial collapse, and they don't necessarily have the ability at the present time to lend out as much money as they previously had in the past. 
 
But that's normally the path of least resistance. The problem is that in this economy that is so sluggish, lots of businesses don't show profitability. So if you don't show profitability, the bank is not going to say yes, so what do those businesses that are breaking even or making a small amount of money do? And when they get a big order that comes in and they can grow their business, do they have to pass it up, or are there other alternatives for them to gathering money?
 


Jeff: And that's where we're going to go ahead and we're going to now make that transition in this conversation Don, and we're going to talk about something that I know that you know a lot about. And we're going to key in on one particular source of alternative funding, or maybe it's a process of alternative funding that we'll be learning about for the first time. 
 
The alternative out there that many people may not be aware of but that could prove very fruitful to them does have to do with this factoring methodology that you've talked about. First of all, tell us what factoring is and how long it's been around, and why it's worked so well?
 
Donald: Factoring has been around for a very long time. It started really in the 18th century, ancient Roman times that merchants used it. It's a guaranteed trade credits. So Rome was shipping to Egypt, and they needed some type of funding for it to go on to the boat and to pay for it for that long passageway from Rome to Egypt. So factoring really started that way.
 
And then it really took over the medieval times and Europe. They really took hold and became a very popular form of lending. And currently if we're going to the time chart, the number one country when it comes to the most amount of factoring done in the world happens to be China. And the second country would be the United States. But if you combined all the European countries together, probably European block there's more than the United States. It's about a 3 trillion dollar industry. 
 
And in 2015, believe it or not, it was at an all-time high. So the most amount of factoring ever done was done last year. And I would imagine that this year we'll probably have 15%-20% growth from there. So it is gaining in popularity even though it's been around for a long time because it's tough to small businesses out there. And the way that the banks really stop lending has created a lot more popularity towards factoring.
 

So the beauty of factoring is that it has a tremendous amount of flexibility. But the biggest advantage of factoring is that there's no real dollar limit.


Jeff: Why do you think that factoring has not grown so much in this country and why is that it's kind of been slow to catch on here?
 
Donald: I don't know if it's slow, but in China there's a tremendous amount of businesses out there that are growing very rapidly. And I think that factoring, just because of the enormous amount of growth... GDP in the United States is somewhere around one- and three-quarters to two percent, where in China even though it has gone down dramatically it's still 4%-5% growth. So the GDP growth is much stronger in China than right now than the United States.
 
So I think it's just more common practice. If you see the amount of factories and the amount of orders that are coming in, many factories don't have enough money in order to fill their orders, so they use factoring instead of going to the bank. An order comes in from an importer in the United States for $300,000 and the factory needs $100,000 in order to produce those goods. It's very easy for them to show, "Hey, I got this purchase order coming in, can you lend me the $100,000? And then when the client pays me I'll pay you back.” It's a very easy way to conduct business.
 


Jeff: We're going to continue our conversation on factoring as a way to deal with your cash flow issues, as a way to solve those problems if only temporarily, but it'll really help you to regain some traction and continue to move forward with your company and grow your business all at the same time while you wait for those receipts from you customers to come in. 
 
My name is Jeff Allen. My guest today is Mr. Donald Jacobs from Midland American Capital. We'll continue our conversation when "Deal Talk" returns right after this.
 
If you'd like to share your knowledge and expertise on any subject related to selling businesses or helping business owners improve the value of their companies, we'd like to talk with you about joining us as a guest on a future edition of "Deal Talk." Interested? Contact our host Jeff Allen directly. Just send a brief email with "I'd like to be a guest" in the subject line. In a brief message include your name, title, area of specialty and contact information, and send it to jeff@morganandwestfield.com, that's jeff@morganandwestfield.com.


Selling your business may be the most important business transaction you'll ever undertake, so don't go it alone. Work with an organization that has made it their business to sell businesses and that's all they do. Morgan & Westfield at 888-693-7834. At Morgan & Westfield we know that selling your company is not something you should take lightly. It can be a stressful, difficult, even emotional process. That's why it's important to work with a team whose one and only specialty is selling businesses throughout the United States. And Morgan & Westfield will help you every step of the way, from helping you plan your exit strategy, to preparing a comprehensive appraisal, and locating the right buyers. 
 
Without the right team behind you, you could be leaving money on the table. So don't leave your most important business transaction to chance. Call Morgan & Westfield for a free consultation at 888-693-7834, 888-693-7834, or visit morganandwestfield.com.


Are you a professional adviser, accountant, attorney or a wealth manager, or do you provide other professional services? Contact us today to see how our reliance program can help you increase your firm's revenues. Call Morgan & Westfield at 888-693-7834. That's 888-693-7834.
 


Jeff: If you'd like to listen to "Deal Talk" and have something that you can refer to with regard to the content over and over again as you need it, morganandwestfield.com, that's where you can find the complete transcript of this show. And don't forget also too when you're on the road or wherever you'll go, you can also hear this program "Deal Talk" available on iTunes, Stitcher and Libsyn as well.
 
My name is Jeff Allen with my guest today Mr. Donald Jacobs. He is Senior Vice President, Business Development at Midland American Capital. And we're talking about alternative solutions to help you deal with your cash flow issues. And we're talking about the idea of factoring. This is something that Donald knows quite a bit about.
 
Donald, we spoke a little bit. You kind of talked a little bit about what factoring is, how long it's been around, and that it is growing as far as the solution is available to many businesses all across the country through companies in fact like yours, Midland American Capital, for example. But what I'd like to talk to you now is about instances where in fact factoring can be used, the types of businesses or operations that could benefit by factoring, and how those companies actually use this to combat their own cash flow issues.
 
Donald: Thank you, Jeff. We offer basically to different services, which is rare in the industry. At Midland we offer both purchase order and accounts receivable funding. So what is accounts receivable funding based on the invoice amount that you have. So if you had an invoice for $100,000, we would advance you $80,000 at the time that your goods ship. So rather than waiting with 30, 60, 90 days with your client's pay, you get paid right away. 
 
And when the client pays what we call the getter. you get to 20% that we haven't paid you already minus our fee. So what does that do for you? What it really does is it increases your cash flow. So if you have an order that's going out, sometimes it could be very, very critical on your cash flow if you have that $100,000 ad on the street. 
 
And you have to pay your employees, you have to pay taxes and other types of expenses out there, you don't have the cash flow to do it so you get behind and it creates all different types of wrinkles to your business. So by us giving you that money we could basically improve your cash flow so you don't have those issues. 
 
The number one thing that that really does is it rebuilds your credit so that down the road you may be able to go to a bank and say, "Hey, look, I pay all my bills on time and therefore I should be able to get an increase on a distance revolving line of credit that I haven't been able to get into the past.” So many people use factoring in order to improve their credit. The increase in cash flow allows you to grow your business where before you had to pay off, you had no cash in order to pay for goods. So by the increase in cash flow you also have more goods to be able to build up your inventory and have a much stronger business.
 
We also do purchase order funding. And what is purchase order funding? Another term for it is called supplier funding. So say you got a big order in from a big box store for blankets, and you needed to buy a container load of blankets. And that container load of blankets is going to cost you $300,000. Many businesses don't have the $300,000 in order to pay for the goods to the factory because, especially if it's a new situation, the factory's not going to give you terms. If it's a situation where you're buying overseas it's very rare that the factory would give you terms. So you need to come up with that money.
 
A company like Midland or a factoring house with those purchase orders would be able to give you 100% of the cost in order for you to buy those goods. For example, I presently have a deal where it's tequila. And he is buying tequila and he got a huge distributor in the United States to carry his goods, which is a wonderful thing for the business. But the first order for the tequila is $200,000. And he doesn't have the $200,000 or he doesn't have the $125,000 that he needs to pay for the supplier to fulfill the order. 
 
By him going to a factoring house he can get those goods paid for, and we will pay directly to the factory so that he can fulfill that order and to grow his business. So it basically allows a business that if they needed funding from soup to nuts we could pay for the entire transaction. And the beauty of factoring is that it does it without incurring any other debt. So if you went to a bank and you borrowed money from a bank on your balance sheet, you would see that you borrowed $100,000 and $200,000, or whatever the amount of money that you borrow from the bank. 
 
When you go to a factoring house, instead of you making a dollar you may make 90 cents, but the debt never shows up on your balance sheet. So it looks like it was funded through the business. So you can use our money and we don't take any percentage of your business that an angel investor or an equity house will take with it. So you don't have a partner. You could do whatever you want with the money; it's an excellent alternative if you can't get traditional funding.
 

You can use our money and we don't take any percentage of your business that an angel investor or an equity house will take with it. So you don't have a partner. You could do whatever you want with the money; it's an excellent alternative if you can't get traditional funding.


Jeff: How do you get your money? In other words what slice, what percentage here do you kind of if you would extract. You mentioned that the invoiced amounts are actually kind of invoiced at a discount, which means that you get that percentages taken out, which is what?
 
Donald: The way that it works is that we don't get paid directly from our client. So if it's the case where it's combined purchase order and accounts receivable, and the factory needed $80,000 to complete their order, we would pay the money directly to the factory. Then the order would come in and an invoice will be generated to the client that’s ultimately going to buy the goods. At that time it would convert over to accounts receivable and there will be a bump up, so that it would be 80% of the invoice amounts with it.
 
Then the client would pay, the debtor, the one that's going to end up with the product, we'd pay to post off this box. And once we receive that check we would give the 20% we haven't given already minus our fee. And that's how it would be.
 


Jeff: OK. And as you mentioned, too, this is helpful toward the credit standing of the company as an added plus. Are there any companies that would just rather choose to continue to work with a company such as yours, for example, Don, on a regular, ongoing basis to handle their receivables or entirely for them? 
 
Or is that not the business that you provide? In other words, you're there for a specific purpose for such an occasion when cash flow is difficult. But you're not there to handle receivables at all times, 100% of the time for a company are you?
 
Donald: Most factoring houses do have a year annual contract because there is a certain amount of start-up cost for any factoring and fees to do it. So a normal account really does last for a year. 
 
But we also have accounts that you have for a long time. For example, the hospital industry is famous for paying very, very late. So many people that are on the hospital and supply hospitals cannot wait for 90 days that a hospital normally takes in order to pay. 
 
So we have many of those type of accounts that stay with us. We also have a lot of staffing companies. And staffing companies, they're the model of cash flow issues in that the more you grow, since you're hiring people in order to be used in other companies, your payroll. The more people that you hire the higher your payroll is, the tougher it is for you to manage your cash flow. 
 
So there's large numbers and a high percentage of staffing type companies that use factoring just as common center and others. So there are companies that basically really need factoring in order to survive and use factoring for long periods of time. Basically for the time that they're in business they will continue to use a factor. 
 
What has happened though, because it's a sluggish economy, is more mainstream companies are coming into the fold and also using factoring, saying, "Hey, I'm having a tough time. I can't get money from a bank so I'll use a factor.” And basically you're going to use factoring for a year or so, get through the difficult time, build up enough of a cushion where they may not use this. 
 
If they use this for specific transactions, so they get a big order from a big box store and they need to fulfill that order, or they get a big military contract, or they get a government contract, or they get a big order from Home Depot and they need money in order to fulfill that order, they would go to it. 
 
So the beauty of factoring is that there's no minimums and you can factor as much or as little as you want so you can use it for a specific transaction. And then not use it for a couple of months, and then get a big order in and use it. Or you can just use it for parts so that you could take four or five accounts and say, "Hey, these accounts will generate enough money, or if I get advances off of them, I'll have good cash flow and I won't have to worry about meeting payroll, or taxes, or having enough inventory, I'll only factor part.” 
 
So the beauty of factoring is that it has a tremendous amount of flexibility. But the biggest advantage of factoring is that there's no real dollar limit. So if you got an order in and you're lucky enough to get an order in from a big account, and it was a million dollar order. And say you were a half a million dollar business, how are you going to be able to fulfill that order? With factoring there really, really is no issue. The bigger the order is and it's a good getter, you have no issue fulfilling that order. 
 


Jeff: We kind of now have a really good lay of the land here, I think, Don. I guess my last question might be for this discussion is who would not be suited to factoring as far as a business is concerned that is in need of a solution to help them with their cash flow issues? Is this something that is appropriate for all businesses?
 
Donald: In order for it to work in the factoring type situation, you need an invoice. So retail is not good. It is online and customers are paying you, it's no good. So you need to be business to business, and it needs to be in a situation where you're waiting 30, 60, 90 days to collect your money so that there's an invoice.
 


Jeff: Don, let's go ahead and wrap up then by providing your contact information should anyone have any questions or be interested in obtaining that information you say that you have there.
 
Donald: The name of the company is Midland American Capital. My name is Donald Jacobs. I'm a Senior Vice President, Business Development Officer. And my direct telephone number is 516-393-2659. And my toll-free number is 800-753-3300. And my email address is donald.jacobs@midlandamericancapital.com. 
 
And I'd be happy to send out information about the industry, not necessarily specifically about Midland, but you should have a thorough understanding of what factoring can do for your company and a thorough knowledge of stand-alone accounts receivable and purchase order funding, and if it would be a good fit for your particular cash flow issues.
 


Jeff: The gentleman is not only knowledgeable but he's extremely sincere, and I want to thank you so much for joining us today.
 
Donald: Thank you very much, Jeff.
 


Jeff: That's Donald Jacobs. He's Senior Vice President, Business Development at Midland American Capital. I hope that you got a lot out of this discussion today, I know that I did. I try to learn something each and every time I step behind this microphone with our guest. Once again, we want to thank Don for joining us on this program.
 
"Deal Talk" is brought to you by Morgan & Westfield, a nationwide leader in business sales and appraisals. Learn more at morganandwestfield.com. My name is Jeff Allen, thanks so much for listening. We'll talk to you again soon.
 
While we take reasonable care to select recognized experts for our podcasts please note that each podcast presents the independent opinions of such experts only and not of Morgan & Westfield. We make no warranty, guarantee, or representation as to the accuracy or sufficiency of the information provided. Any reliance on the podcast information is at your own risk. The podcast is for general information only and cannot be considered professional advice.

Key Takeaways

  • In order to avoid being surprised by the value of your company when beginning the process of selling your business, start the valuation process early and continue to have a business valuation every couple of years so.
  • A business is less desirable to buyers if it relies on one or two vendors, or one or two customers.
  • Reducing the areas of risk in a business will increase its value.
  • Ways to cut expenses, without jeopardizing revenue, and show the highest earnings possible include adjusting officer compensation to industry standards, putting a management team in place so that customers are not dependent upon one or two key employees and broadening your customer base. 

Read Full Interview

Jeff: The results of a business appraisal can be surprising, and sometimes even shocking. If you want to learn how to improve value after a less than desirable appraisal, or how to avoid shocking results in the first place, then you've come to the right place.
 
From our studio in Southern California, with guest experts from across the country and around the world, this is "Deal Talk." brought to you by Morgan & Westfield, nationwide leader in business sales and appraisals. Now, here's your host, Jeff Allen.
 

Jeff: Hello and welcome to the web's number one content source for small business owners committed to building a business for eventual sale. Here on "Deal Talk" it's our mission to provide information and guidance from our growing list of trusted experts that you and all small business owners can use that information to help you build your bottom line and improve your company's value.
 
What's all the big deal then about business appraisals and valuations? Well, sometimes we found out that oftentimes we get those calculations back and they are far less than we expect. At least they're different anyway. Sometimes they're maybe a few thousand or a few $10,000 off what we kind of expected in other times, for most of us anyway. Those folks who order valuations are often mystified by the gap, the difference between what you believe your business might be worth or might have been worth, and what your valuation consultant says. It actually is in fact worthwhile. 
 
I want you to stand up and take notice, or sit forward and take notice of this program, because it is in fact for you if you have had a valuation in the past that did not meet your expectations. And you're not exactly sure what you need to do to bridge the gap between the information that you got back and where you think your business needs to be. And this is particularly important if you have designs on selling your company sometime in the next few years.
 
Here to talk with us all about this particular subject, Matt Turpin. He's joined us in the past here on "Deal Talk." He's a CPA licensed in Florida and Alabama, and also a certified valuation analyst with Carr, Riggs & Ingram, LLC. Mr. Turpin carries additional designations, including certified mergers and acquisitions professional, and chartered global management accountant. Matt Turpin, welcome back to "Deal Talk." It's good to have you back on the program.
 
Matt: Great to be back, Jeff. Thank you for having me.
 

Jeff: Well, it's good to hear the gentleman with the Southern draw back amongst us here and providing his information that we have really been looking forward to you sharing, Matt. I get these numbers back, and the first question that pops to mind, well this can't be right. How do I know that these in fact are right? How do I as a business owner know, Matt, that the valuation that you've calculated for me and my business is in fact complete and accurate?
 
Matt: That's a great point, Jeff. The quickest way and probably one of the easiest ways is to look at the valuation report. Is the valuation report under the guidelines of a governing body such as the National Association of Certified Valuation Analysts, or NACVA? Or is it under the American Institute of Certified Public Accountant, the Accredited Business Valuator Designation, or the ABV Designation? Those are just two of the designations, but probably the most common when it comes to a CPA-backed valuation credential.
 
We have guidelines and standards that we have to follow in preparing a business valuation. You're right. A lot of business owners, particularly member-managed businesses, are not particularly thrilled when they see the results of their business valuation. So the best way to not be surprised is to start that process early and fairly regularly, or often, to have a business valuation every couple of years so that you are not surprised when you see the value of your business. 
 
I tell potential clients this almost every meeting. If you are a business owner that is relying upon your business for your retirement, if you had a retirement account with one of the large financial institutions, you would get a monthly if not an annual statement that shows the value of your retirement plan. If you're using the sale of your business more importantly as the indicator of when you can retire, or that money will be used for your retirement, it would be questionable not to have a valuation done every few years, so that you do know the value of your retirement.

There are no two businesses that are alike.

Jeff: Is it flawed thinking on a business owner's part, Matt, to believe that, OK , I get this calculated value here and I'm not exactly thrilled with it. But I'm inclined to believe that I can get more for my company than what these numbers are telling me I can get. Is that wrong for a business owner to think that way and would they in fact be making a mistake by listing their business at a figure that is much higher than that valuation that you've calculated for them?
 
Matt: The answer to that is probably yes and no. The business owner can list or can ask whatever price they think the business will cost it to for a sales transaction, much like a house. 
 

Jeff: OK.
 
Matt: The issue is if you have a strategic or a financial buyer, there are certain things called synergies. If a competitor wants to buy another competitor, there may be economy, the scale, where the two businesses combined can make more money than the two business separate. So that's your financial or your synergistic buyers. 
 
In those types of situations, yes, absolutely. There would be a situation where the business could sell for higher than the calculated value. In other situations where it would be a top lieutenant in the company that's buying out the majority shareholder, there could other factors or indicators that bring that value down. 
 
Say, for example, a dentist practice. If a dentist has the key relationships with his or her patients, that really does restrict the value in "handing the baton over." Any type of service industry has that risk of when you sell your business, the customers, patients, clients will not automatically transfer over to the new owner. So that is your risk in selling for less than what the value has arrived at.
 

Jeff: Joining me again today is Matt Turpin, if you're just kind of listening over someone's shoulder. He's a CPA and CVA, certified mergers and acquisition adviser at Carr, Riggs & Ingram, LLC. Joining us for the second time, today on "Deal Talk." My name is Jeff Allen. 
 
Matt, why is there such a gap between what I had estimated the value of my company to be and the number that you calculated? Where do most of those differences lie?
 
Matt: Jeff, most of the differences lie between the, it's what's called discounts. It could be a discount for lack of marketability, which, if you're a member-managed, or traditionally what we've known as a smaller business, you've got discounts for lack of marketability. This is not a business that can be bought and sold on a publicly traded market much like the NASDAQ or the New York Stock Exchange.
 
So you have a discount for lack of marketability, which can range anywhere from below 20% up into the high 30s, maybe even 40%. If you go along RS regulations in determining fair market value, that would reduce the value of the company. You also have a discount for lack of control. If you're selling less than a majority shareholder position or ownership position, which would be 50% or less, then there's a discount that needs to be applied because the buyer does not have control of the cash.
 
The biggest reason why there will be a gap between perceived value and what we could call actual value, which would be the value that's derived from a business valuation engagement, is going to be the capitalization rate. A capitalization rate is going to be the inverse of a multiple. A lot of people are very familiar with the multiple. 
 
Let's say if I have a company that's grossing a million dollars a year in revenue, I want to use a multiple of three to sell the business, I would put just a wild guess in the air saying that the business is worth $3 million. Capitalization rates build up to an actual indicator on what to take, the quality of earnings, which is going to be your income after true business expenses. 
 
There are a lot of situations where you get higher than industry average officer compensation. And you may be paying family members through the business that don't actually work day-to-day in the business. Those are normalizing adjustments to arrive at a quality of earnings from the business operations. You apply that number to a capitalization rate. And that capitalization rate is going to be built up at different risk factors. For example, somebody was going to spend a million dollars either putting it into a CD or some safe investment vehicle, it's a much lower risk than going out and buying an operating business. 
 
So you have different risk factors that's going to be just the general risk of buying the equity of a stock. You've got the general risk of buying a small company and you've got the specific company risk, meaning the company that a potential buyer is looking at for the subject company, and when I say subject company, I mean the business that an individual is looking at buying. 
 
Or if an individual selling their business, what is the risk associated with selling that business? Are there key employees that really produce a lot of the income or create a lot of the customer loyalty, that if those key employees were not there it would seriously affect the revenue of the company?
 
When you look at these factors that create the gap between a business owner's perceived value, a lot of times you talk to a business owner and they've already got an idea in their head of what the value of the business is, whether that's through talking to competitors, or talking with peers in the industry for multiples, or reading industry periodicals that tell you this is what the business should be worth. There are no two businesses that are alike.
 
That can go either in the positive or the negative for the business owner. If I'm a business owner, and actually, Jeff, this is what got me into business valuation, is I had a client that was very profitable, had a very well-oiled machine in his business. And he was offered, I can't remember the exact number … let's say three times his revenue as a multiple to sell his business. 
 
My first question was why not five as a multiple, why not six? Who made the rule that it's got to be three, particularly in this kind of business because he didn't have to work the business. It was just a residual cash flow to this individual. 
 
So when you talk about multiples and how much of my business work based upon a multiple there may be two businesses in the same industry, whether they're competitors or not, it doesn't matter in this example. But one business may be worth two and three times as much as the other one because there may be systems in place, you may have a better management team. You may have a better financial structure. You may have better financial margins. You may have, whether it's longer contracts, the options are limitless of why one business in the same industry values differently than another business in the same industry.

I tell potential clients this almost every meeting. If you are a business owner that is relying upon your business for your retirement, if you had a retirement account with one of the large financial institutions, you would get a monthly if not an annual statement that shows the value of your retirement plan.

Jeff: I'll cut you off there because you've thrown... I'm putting myself in the place of a business owner who doesn't have a CFO or an accountant who can really help them understand the weight of what you're talking about, because there's a lot of the terminology here and some things that I think a lot of people probably may not have a very strong understanding of. 
 
But really, who is the person, who is the professional that I would talk to who would be able to help me, or help my accountant, or CFO, or whoever? Actually assign the multiple that we believe would provide us with an accurate valuation for how much our business could be worth if in fact we have designs on selling this or becoming involved in maybe an M&A deal of some kind in the next three to five years?
 
Matt: Jeff, I'm a little bit biased, but it would be best to use an individual that has a designation in business valuation.
 

Jeff: OK.
 
Matt: Because they're going to have industry data across the board. Not just a few industries but data across the board that not only do you arrive at a value independently but we also have access to databases of what we call a sanity check. 
 
If I arrive at a value, just an example, of a dental practice and come up with $2 million as a value, based upon cash flow and earnings, I have access to a database that says either I'm on base or I am way out of my league based upon transactions that have happened in the past.
 
Again, no two companies are alike, but that's what we call a sanity check, like a rule of thumb that says, "This is my valuation. It is well within an industry norm based upon the transaction that'll happen." Or if the company is strong enough, whether that would be your management team's financial history earnings, then can this company require a higher sales price because they're stronger than the industry or stronger than actual transactions that have taken place?
 

Jeff: What have you found to be probably the most common range of multiples that might suggest that a company has performed well and is selling at or better than market value?
 
Matt: Jeff, you're going to see capitalization. It's going to be anywhere from 20% to maybe even 50%. The lower the capitalization rate the higher the price. In terms of multiple, a capitalization rate of 20% would mean a multiple of five. That's how many times it could fit into a hundred. 
 
A capitalization rate of 20 equals a multiple of five. A capitalization rate of 50 equals the multiple of two. So it's going to depend on the business itself. Largely it does depend on the industry, because that's the track record that an industry specialist is going to go off of.
 
Matt: Anywhere from 20 to 50, which is going to be a multiple of two to five.
 

Jeff: OK. Have you ever seen anything higher than that?
 
Matt: Oh yeah. In certain industries you may have a multiple of 10. 
 

Jeff: OK. And that's a nice pay day right there.
 
Matt: Yes. It really is a nice pay day. There's a lot of factors that built up into that, but most of the factors are built around risk. What is the risk of purchasing that company?
 

Jeff: Matt, I'm going to take a short break, but when we get back what I'd like to do is I'd like to start to get into over the part of the conversation where we start to talk about the types of things that we might be able to do to, kind of, get that valuation moving in a better direction to kind of close that gap between what we assumed our business might have been worth and what a professional such as yourself is telling us our business is actually worth based on his calculations and going through.
 
I'm going to continue my conversation with Matt Turpin on valuations and how you can now close the gap or start thinking about ways to close that gap between what your expectations for your company's value was and what it could be when "Deal Talk" resumes right after this.
 
If you'd like to share your knowledge and expertise on any subject related to selling businesses or helping business owners improve the value of their companies, we'd like to talk with you about joining us as a guest on a future edition of "Deal Talk." Interested? Contact our host Jeff Allen directly. Just send a brief email with "I'd like to be a guest" in the subject line. In a brief message include your name, title, area of specialty and contact information, and send it to jeff@morganandwestfield.com, that's jeff@morganandwestfield.com.


Selling your business may be the most important business transaction you'll ever undertake, so don't go it alone. Work with an organization that has made it their business to sell businesses and that's all they do. Morgan & Westfield at 888-693-7834. At Morgan & Westfield we know that selling your company is not something you should take lightly. It can be a stressful, difficult, even emotional process. That's why it's important to work with a team whose one and only specialty is selling businesses throughout the United States. And Morgan & Westfield will help you every step of the way, from helping you plan your exit strategy, to preparing a comprehensive appraisal, and locating the right buyers. 
 
Without the right team behind you, you could be leaving money on the table. So don't leave your most important business transaction to chance. Call Morgan & Westfield for a free consultation at 888-693-7834, 888-693-7834, or visit morganandwestfield.com.


Are you a professional adviser, accountant, attorney or a wealth manager, or do you provide other professional services? Contact us today to see how our reliance program can help you increase your firm's revenues. Call Morgan & Westfield at 888-693-7834. That's 888-693-7834.
 
Jeff: You can listen to "Deal Talk" on Stitcher, Libsyn and iTunes. And we also have a fourth channel for you, morganandwestfield.com. That is the only place where you can listen to the show and get the complete show notes to go along with it. So of course you could read along with every word that you hear us talking about here on "Deal Talk" while you're on the morganandwestfield.com website. 
 
Or simply take and print hat PDF out, copy it to your machine, save it for later. You can come back later for easy reference. In that way you've got it all in writing. Some people think it's easier to take that writing with them depending on where they want to go or if they want to share certain key parts of our conversation with a friend or a colleague. 
 
Once again, that site is morganandwestfield.com for not only the podcast but the complete show notes. My name is Jeff Allen, joined once again today by Mr. Matt Turpin, and he's really an expert in the area of M&A but specifically having him on today to talk about valuations. 
 
We want to aspire, I think, really Matt, to reach a valuation that we're pleased with and one that would stand up during the sale of our business. So how do we start to bridge that gap and get from where we are, reality, to where we want to be, which is what we might consider ideal later on?
 
Matt: That's a great question, Jeff, and a question that we address quite often. Typically I suggest that business owners have a five-year plan to sell. Don't just decide that next year you're going to sell. Because there will be that shock of what the perceived value is and the price that the business could actually demand on the market. 
 
Of course this list is not all inclusive, but we've all heard the term “cash is king.” And that is true when it comes to most business valuations. You want to have the highest quality of earnings as possible that your business can earn. When Is say quality of earnings, meaning income minus your actual business expenses. If you've got a business that doesn't really require you to travel yet you've got some travel in there, of course that reduces your earnings. 
 
Taking a three-year, forward-looking approach on cutting expenses that can be cut without jeopardizing revenue and showing the highest earnings as possible. Of course, that's going to be the hardest thing to do but the easiest way to increase value. You could adjust officer compensation to industry standards. You can put a management team in place so that customers are not dependent upon one or two key employees. You can broaden your vendor base if that's applicable to your business. You can broaden your customer base. 
 
Nobody wants to buy a business that relies on one or two vendors, or one or two customers. Again, that goes all into the risk of buying the company. If I can cover it with an umbrella, the main objective in growing the business value would be to reduce the areas of risk in your business. Of course, that cannot be eliminated 100%, but reducing those risks of a potential buyer is going to be increasing the value of your business.
 

Jeff: I'm sure that you've probably gotten questions like this before. We're all human and some of us have some questions that quite frankly you might roll your eyes at from time-to-time after a while, Matt, someone in your position. 
 
When you have a chance to advise a company about maybe on plans that they have about moving forward with a sale or preparing their company for a sale and things have not been going well admittedly. The proof is in the numbers. And things have been tough the last couple of quarters, the last few quarters, and you've got someone, a CEO and his team have put in a lot of long hours into their business. 
 
Doesn't sweat equity account for something? When it comes to you going out and looking at this company and providing a comprehensive valuation. Is there any possibility that there's some kind of value that you can assign to effort? I don't know how else to put it.
 
Matt: That is a very popular item.
 

Jeff: I thought so.
 
Matt: When you talk about sweat equity, if that's what equity has generated, cash flow, yes, of course. But you're measuring the cash flow, you're not measuring the sweat equity, because that's when equity has turned into cash flow. If you look at sweat equity alone, somebody putting in long hours and is not producing any results, then there's no other answer than, no, the sweat equity does not generate value. But if that's what equity turns into, relationships, potential contacts, let's say a deeper vendor base, a wider potential customer base, another product, then, yes, that's when equity could be of value, and it could be of value to a specific buyer.
 
There is no flat line answer. No. Sweat equity does not generate and give value because sweat equity can’t generate value.
 

Jeff: I've got just a couple of moments left here, Matt, in the program today. What is wrong with the ideology that I can improve the value of my company by strictly going out and just working harder to generate greater revenue? If I go out and I increase my revenue by 25%-35%, doesn't that take and translate to something similar in terms of value later on?
 
Matt: It can. It depends on how much you've had to spend to generate that increase. If you've had to spend more on advertising, if you had to spend more in commissions. If the bottom line, so to say, is not increased, then there could be a situation where you're just spinning your wheels. If it does create a greater economy of scale, where an increase in revenue decreases the overall percentage of expenses or a certain expense classification, then absolutely it can help.
 

Jeff: Matt Turpin, I appreciate your time on the program today. No doubt there are business owners in your neighborhood, those listening to this program right now who might want to get in touch with you to talk about their particular situation, how can they reach you?

Typically I suggest that business owners have a five-year plan to sell. Don't just decide that next year you're going to sell. Because there will be that shock of what the perceived value is and the price that the business could actually demand on the market.

Matt: Sure. They can reach me through my email, which is mturpin@cricpa.com. They can reach me at 850-337-3241. They can also go to our website, cricpa.com, Carr, Riggs & Ingram. There are a number of ways. You can also find me through the National Association of Certified Valuation Analysts. I'm in their database there.
 

Jeff: And that means that you're pretty good, and we appreciate you, Matt, for making time for us in your schedule before you head on out for the day. It's been a pleasure, and we look forward to having you again on our program at some point in the future. Thank you.
 
Matt: Thank you, Jeff. I always enjoy talking with you.
 

Jeff: That's Matt Turpin, CPA, CVA and a certified mergers and acquisition adviser at Carr, Riggs & Ingram, LLC. 
 
Let us know how we're doing on "Deal Talk," won't you? We would love to hear more from you. Send us your comments, compliments and criticisms to dealtalk@morganandwestfield.com. Once again, that's dealtalk@morganandwestfield.com
 
"Deal Talk" is brought to you by Morgan & Westfield, a nationwide leader in business sales and appraisals. Learn more at morganandwestfield.com or by calling 888-693-7834. Again, 888-693-7834. I'm Jeff Allen, here's to your success.
 
While we take reasonable care to select recognized experts for our podcasts please note that each podcast presents the independent opinions of such experts only and not of Morgan & Westfield. We make no warranty, guarantee, or representation as to the accuracy or sufficiency of the information provided. Any reliance on the podcast information is at your own risk. The podcast is for general information only and cannot be considered professional advice.


Key Takeaways

  • Crowdfunding is a private security transaction that is targeted at retail investors.
  • Development around digital finance is causing the cost of capital acquisition to go down.
  • The digital finance market essentially is a complement to the existing financial market.
  • Crowdfunding is an alternate source of obtaining financing for small-business owners. When soliciting financing through crowdfunding, you need to understand who your company is being presented to and tailor your presentation accordingly.

Read Full Interview

Jeff: Crowdfunding is changing the way entrepreneurs fund their businesses. If you want to learn more about how the business financing landscape has changed and what the future holds, you've come to the right place.

From our studio in Southern California, with guest experts from across the country and around the world, this is "Deal Talk," brought to you by Morgan & Westfield, nationwide leader in business sales and appraisals. Now, here's your host, Jeff Allen.


Jeff: Hello, and welcome to the web's number one content source for small business owners committed to building a business for eventual sale. Here on "Deal Talk" it's our mission to provide information and guidance from our growing list of trusted experts that you and all small business owners can use to help you build your bottom line and improve your company's value.

The world has obviously changed a lot for us owners of small and mid-market businesses. And thanks to the explosive growth of all things digital, and I do mean all things, so has the way that people can fund or at least partially fund their startup businesses or the growth of their established businesses. What could that mean for any plans you may have for expanding your company and your quest to improve its overall value? We're going to try to get some answers from our guest on this edition of "Deal Talk." Markus Lampinen is the co-founder and CEO of Crowd Valley in San Francisco. Markus Lampinen, welcome to "Deal Talk," it's good to have you sir.

Markus: Thank you, Jeff. It's definitely a pleasure to be here.

I think it's good news for business owners in a couple of different ways. One is that the cost of capital acquisition is definitely going down. But the other one, very practically speaking, is that if investors can bring their cost of making a deal happen down that means that investors will be able to get into different types of asset classes and different positions in companies.

Jeff: Crowd Valley, familiarize our listeners about what you and your team do.

Markus: Like you said, we work with this changing landscape of online finance, or take essentially offline finance and how it's interacting with the online finance landscape. What we and the company at Crowd Valley do is really help these financiers, so lenders and investors, move their business processes into an online matter. What that means is essentially creating these types of online applications where a lender can essentially offer business loans through an online portal, or solicit essentially various different investors through an online portal, or essentially get these applications for financing, whether or not it's equity transactions or done through an online portal. 

So streamline the process for finding the sources of capital but also matching those sources of capital to the actual recipients of that capital, whether or not... It's like you said, early-stage company startups, growth state companies, but it is also other types of asset classes. Like, for example, we work a lot in real estate, but I think we can focus on the business side.  

But just myself as background, I'm born in Stockholm, I grew up in the Midwest in Kansas. Last eight years I've been working with this digital finance market starting out of Hong Kong, then London, then New York, and now here in San Francisco Bay Area for the last two years. So, definitely can expect me to have a little bit of an outlook on the market not just in terms of geography. I started in 2008, and I mean that's the fun times of finance. Everything was in a sense going downhill.



Jeff: That's right.

Markus: But that's really the emergence also for these markets, that a lot of the need for more efficient ways of essentially accessing capital and streamline the process, that's really where they emerge.



Jeff: How has crowdfunding, or the concepts of digital finance allowed business owners to grow their businesses? How advantageous has it been for them in terms of being able to procure capital?

Markus: You can think about it in very, very basic building blocks. What essentially this development around digital finance means is that the cost of capital acquisition is going down, which means that the process, and I'm talking time and money for actually getting access to the right investors. The right investors getting access to you as the business owner. That is getting shrunk essentially by a lot of these types of models. 

Practically speaking, what that means is for a business owner, actually looking for working capital or a debt solution, or a debt instrument. Then there are a lot of online options nowadays that are emerging. There are a lot of regional banks, a lot of institutions that are looking at alternative ways that maybe as a bank they can't offer you the loan that you're looking for, but they could have a community of various types of alternative lenders. That could then be private individuals, different types of maybe smaller funds, whatnot, that would essentially work through a non-conventional model where it's more of a peer-to-peer lending or a peer-to-business loans type of marketplace. 

I think the bottom line is that, obviously, the fundamentals of finance and financing, they're actually not changing. But it is the structure that by streamlining the process, by, for example, having a single point where you as a business you can go in into an online application, online marketplace, you can essentially submit your information there, you can get a quote back that this is the type of working capital solution that we could provide for you. Then that can speed up the process quite a bit. 

But I will say as a caveat that... Since 2008 I've kind of seen myself or heard myself say repeatedly each year that we are still very early on in the market. I still think that that's very, very true. If you look at the financing and the online finance space in the U.S., we're at a little bit under $10 billion a year, and certainly 10 billion is a huge number. But that being said, looking and comparing that to essentially small and medium-sized business financing from traditional institutions, which is in the hundreds of billions or trillions even depending on what you include in that, then it's still a very, very clear minority.

But I think as the education also develops, and as these institutions, lenders for example, or even the equity investors, they figure out how they can streamline their process. I think it's good news for business owners in a couple of different ways. One is that the cost of capital acquisition is definitely going down. But the other one, very practically speaking, is that if investors can bring their cost of making a deal happen down that means that investors will be able to get into different types of asset classes and different positions in companies. 

For example, maybe in the smaller deals or maybe in the sectors that have been hard to put structure around the deal. And that just opens up a few possibilities. But it is still very early in terms of looking at this market. And I think in the U.S., in particular, there's still a lot of opportunities on the table for both companies to push their lenders and investors to adopt more streamlined tools, but then also actually as an ecosystem to create more knowledge around what is digital finance, what is financial technology, how does it relate to the existing sector, how does it relate to business owners, and how you foster that entire communication.



Jeff: A part of the conversation has been that business owners are kind of limited to how much money they could actually obtain through these crowdfunding sources. Is that still true? Are the limitations such that it really only restricts a business owner to doing so much with these particular funds where they may not necessarily be able to obtain all that they need to start their business, if it's a brand-new startup, or capitalize an entire growth project. Tell me a little bit about the limits and how much money could actually be obtained through these online sources.

Markus: That's a good question, and it's also one that has various different dimensions to it. So let's just take a step back and look at the term crowdfunding. So typically crowdfunding will refer to essentially a private security transaction that is targeted at retail investors. And retail investors are the non-accredited investors. And in that world, there are certain limits, and there are also essentially, there's specific regulation, the Title III of the JOBS Act for you who are interested in looking at that. 

But just taking the basic concept to us, crowdfunding. There's a transparency, there is the efficiency, and then there is essentially the access that you're creating. So transparency in the process in terms of what's actually being done, the fees, efficiency in terms of time and capital that actually goes into this process, and then access in terms of access to new asset classes, access to new investment opportunities for different types of audiences. 

So taking that frame of mind that we are talking about something that is maybe a little bit more of a concept rather than anything set in stone at this point. And I often say there's various different types of crowdfunding. Like you can talk about crowdfunding with family office type of investors, investors that are qualified and accredited by a long stretch that are very sophisticated in their investment. But if you're able to approach not just three but for the cost of approaching three approach 30, for example. And that's the sort of crowdfunding in my head.

And then there's many different permutations for that. But if you look at the very, very basics. A lot of times for a growth company, then you will go into the venture capital space or the private equity space, and we work with some venture capital companies that are creating these types of online marketplaces where they will have their traditional investment model. Like their traditional venture capital financing structure, which they have a mandate for, which they have an LP that has given them money. 

But there are a lot of deals that they see that don't fit into that category. So it might be that they foster essentially a co-investment platform where people can sign up and they can essentially get access to these types of deals that are outside of the venture capital fund’s mandate. For example, in the private equity space we see that there are a lot of firms that are generating deal flow from online portals. 

So just to give you an example there that we work with a private equity firm that essentially raises capital from an online platform, or using an online platform that we power for essentially helping with the generational shifts in terms of small and medium-sized company. And they're not raising a million, they're raising typically between 10 and 30 million.

They will go into a healthy business, they will look at the business, the owner wants to retire. They want to foster essentially a continuity in the company. They will raise, let's say, $20 million for a company that's doing $20 million a year in terms of revenue. They will go and they will help with that generational shift, and they will just raise capital from the online finance, or online means. 

And this specific example that I'm giving, it's a company called Cobalt Funds out of the U.K., actually. And the reason that I'm giving it is I find that example was quite interesting in a way that you don't typically think about that as crowdfunding in terms of playing in that type of a niche. But that's what we see, that those types of applications, whether or not it's growth capital or startup capital, there is various different permutations of this model. It's about finding the right one.

And it also goes to this other point that if you are, for example, a company that has a solid business. You have revenues, you have recurring customers, you have good business, then there are different types of investments or different types of capital sources that might be more appropriate to you than the other sources. 

So just as an example for that is if you are a Silicon Valley startup. You probably want to raise equity capital because you probably don't have revenues and a loan isn't that attractive. But at the same time if you are a company that has revenues, a company that has an existing clientele in business, then equity capital might not make sense. And there's a couple of different reasons. 

Obviously, a loan might be cheaper for you, cheaper capital in terms of your cap table. But then also the other way around that aligning interests with somebody that expects their equity to grow but the company is structured in a different way that might be difficult. And I said at the start that these digital finance models, they don't necessarily change the dynamics of finance, and this very much goes back to that. That looking at the type of capital that you need for your company.

There are marketplaces that specialize in various different types of capital, I mean on the equity and debt side, but is also at various different stages of the capital ladder. If you're, for example, looking at raising equity capital, there are different platforms that focus on smaller equity injections, and those might be sourced from a network of credit investors or small funds. There's companies that look at essentially larger areas of capital financing. 

As with any business owner, it is all about the fit. Finding that fit in terms of what kind of capital you essentially take into your company, because taking the right capital can align your interests with essentially the capital source. It can be a great way for you to generate momentum for your company and essentially get a cost efficient source of capital that really aligns your interests with the investors. But then doing the other way around, not taking capital from the wrong source, then that can be a very detrimental idea. 

And again, it's nothing new, nothing revolutionary in that. And a lot of the time that we look at this market, then we encourage people to think about the digital finance market as essentially a complement to the existing financial market. So you're not necessarily seeing anything that hasn't been done before but it's the way that those services are being offered that hopefully they're more efficient, hopefully they're more transparent, and hopefully they are more accountable to all the parties in that life cycle. 



Jeff: We're talking with Markus Lampinen. He's the co-founder and CEO of Crowd Valley Incorporated at the San Francisco Bay Area, and we're really kind of diving in deeply here into this idea of crowdfunding and what the growth of this crowdfunding industry means for your company. And how easy it might make it for you to obtain perhaps capital that maybe you might not find someplace else, or at least it gives you the options out there that you might not have had maybe five, six, seven years ago, maybe even three years ago. But our conversation with Markus Lampinen will continue. 

We're going to talk about when we come back basically the process for obtaining funding through crowdfunding and kind of how that process works when "Deal Talk" resumes right after this.

If you'd like to share your knowledge and expertise on any subject related to selling businesses or helping business owners improve the value of their companies, we'd like to talk with you about joining us as a guest on a future edition of "Deal Talk." Interested? Contact our host Jeff Allen directly. Just send a brief email with "I'd like to be a guest" in the subject line. In a brief message include your name, title, area of specialty, and contact information, and send it to jeff@morganandwestfield.com, that's jeff@morganandwestfield.com. 
Selling your business may be the most important business transaction you'll ever undertake, so don't go it alone. Work with an organization that has made it their business to sell businesses and that's all they do. Morgan & Westfield at 888-693-7834. At Morgan & Westfield we know that selling your company is not something you should take lightly. It can be a stressful, difficult, even emotional process. That's why it's important to work with a team whose one and only specialty is selling businesses throughout the United States. And Morgan & Westfield will help you every step of the way, from helping you plan your exit strategy, to preparing a comprehensive appraisal, and locating the right buyers. 

Without the right team behind you, you could be leaving money on the table. So don't leave your most important business transaction to chance. Call Morgan & Westfield for a free consultation at 888-693-7834, 888-693-7834, or visit morganandwestfield.com.
Jeff: Welcome back to "Deal Talk," my name is Jeff Allen, and just to let you know, if you're listening to this program right now on iTunes, Stitcher or Libsyn, that's fantastic. That's exactly where we want you to be. However, as a bonus, on the morganandwestfield.com website you can also find the complete transcript to this program. In addition to finding the transcripts for all the programs that we have recorded to this point for you. 

Thanks very much once again for tuning in. Jeff Allen with Markus Lampinen, CEO of Crowd Valley Incorporated in the San Francisco Bay Area. We're talking about crowdfunding. Markus, real quick. I do want to talk about the process for obtaining crowdfunds, because many people already know how to go to a bank and fill out a loan application to contact the Small Business Administration or the representative there. Or any number of other sources, private equity firms, they may already be familiar with. 

But first of all, I did want to ask you about something you alluded to. This is something we've touched on very, very briefly in our previous edition of "Deal Talk," and that is the JOBS Act Title III. Can you please explain to us, once again, and for those people who may be listening for the first time, what that is?

Markus: Absolutely. The JOBS Act is a provision that was essentially put forth in 2012 and it's been implemented in various different stages. It has six titles to it, so six different specific components of the regulation. And they've been implemented at different stages of the process. Like Title II introduced the 506(c) offering, which essentially means that for a private security transaction, you can now conduct general solicitation, so market it freely. But at the same time you can only sell it to accredited investors which are then accredited by their net worth or their assets. 

But Title III, specifically, Title III is what's referred too often as a true crowdfunding provision in the JOBS Act. What that specifically means is that you could through these online portals that Crowd Valley work with, then you could through them essentially solicit investors publicly through an online portal and essentially raise up to a million dollars in finances from a retail investor crowd. 

Now, it doesn't have to be just a retail investor crowd, it can be accredited investors too. But for Title III of the JOBS Act, the retail, the non-accredited investor is the key component. This means that specifically for the first time in American history in a public financing market in private transactions you could actually invest in the startups without having pre-existing relationships.

There are some caveats, and we have great material on that on our Crowd Valley blog, for example, on the specifics of the actual regulation. But the key components are essentially for a non-accredited investor than the amount that you can actually invest in startups. It's then linked to essentially your income, and then for the companies, how much they can raise. It has different tiers. So for essentially being able to provide audited financials and you get a higher tier, and ultimately you can raise up to a million dollars.



Jeff: What you're saying is basically is much like the way that investors could invest in publicly traded companies today, private investors, those are non-accredited investors, folks like me, for example, would be able to invest in and perhaps somewhat limited depending on their income would be able to invest in private companies.
Markus: That's right. Hopefully in a secure and a very efficient process.

As with any business owner, it is all about the fit. Finding that fit in terms of what kind of capital you essentially take into your company, because taking the right capital can align your interests with essentially the capital source. It can be a great way for you to generate momentum for your company and essentially get a cost-efficient source of capital that really aligns your interests with the investors.

Jeff: Exciting times. And once more, just the number of opportunities that continue to grow out of this, just unbelievable. The process of obtaining crowdfunds, for those business owners who may be really interested in looking at this and researching this, and thinking about this as a possibility for obtaining capital to grow their companies, perhaps finish a construction project, add new equipment, whatever the case may be, tell us how it works. How do we get this money?

Markus: You mentioned the reference earlier that you know how you go to your bank you fill out the loan application, the SBA in that process. And the process I would argue is not that far removed from that. So you have to find essentially the portal or the platform which has its entry, the investors or the lenders that you're looking for. And you have to find one that actually fits your needs. And I'm not saying that once you see cash then you go all in, but rather research the portals, research the actors, research what they've been doing, what their diligence process is, how they handle the process, what fees they take, and kind of the process from there. 

But really, once you find a platform and you can just search on Google and you can find a lot of press around these portals and your specific niche for example. Let's say that you are working in agriculture, then just start by looking at agriculture innovation and online financing. And you can find probably various different platforms that are focused on that specific niche. But then you just read about them, you get familiar with their process. Typically it goes pretty much like essentially the banking process. 

You essentially have to present your company, of course. They have to do certain diligence on your company, make sure that everything is in check. The amount of diligence that they do, it does really depends on their model and essentially on who they are, but that should be explained to you by them quite clearly. And that's certainly important for you to understand because, that will have an impact on how your company is presented.

And then you need to understand also that who is your company being presented to. Is it going to be these types of investors that fall into this non-accredited crowd? And then your expectations should be in line with that, that you can't expect to raise $10 million if the restriction on the platform says that it's a million tops or even half a million based on different types of statements that you can provide. So understanding the platform and the party that will arrange the financing or broker the financing, that's incredibly important. Because that's essentially who will oversee the process end to end and that's who will also help you in that. 

Their success rate is also important for you to figure out, that, have they been able to help companies like yours before? Because there are specialists all around. But essentially you need to make sure that you have the basic things in place for your company in terms of how to present and create this narrative around your company. 

And it's a little bit different depending on who you talk to. For example, the bank loan application. And certainly if you're working with an online lender that has a similar process and it's going to be quite similar. But if you're talking to a group of ultimately private individuals, maybe some family offices, some wealth individuals that invest essentially into smaller or medium-sized companies for their own personal reasons or out of their own personal cash. 

And it's going to require you to tailor your presentation a little bit. The financials of the company are these types of things, they are what they are, so those are quite factual. But once you actually get to the presentation, and you probably want to emphasize certain things. Let's say that, for example, you are a mission-driven company that seeks to empower, for example, agriculture in certain states. Then that could be something that resonates very strongly with certain types of individuals. So it's all about kind of honing that value prop and that key massage that your company actually promotes.

Like, for example, if I take it back to Crowd Valley, then we are working on essentially this democratization of the financial market, and that's something that we as a company really believe in. And that's certainly something that some other people believe in as well. But finding those people out of these marketplaces, that's important. 

But oftentimes these marketplaces and these operators, these online platforms, they are quite often, meaning that you should be able to have a conversation with them, get information about their process, hopefully also already from their website or the representatives. But certainly you should be able to get somebody on the phone and just talk through these things. Because one of their key roles in this market is education, investor education, but certainly business owner education, and just market education in general. 

Because ultimately, if you're able to be smart about who you approach, and how, and through what process, then that's in their very selfish self-interest as well, which is a good thing. Because ultimately you want the same thing as them, and you want to make sure that those things are aligned as far as possible. That you find the right investors through a structured and efficient process for the right company.



Jeff: And so at the end of the day it really is about educating yourself, taking the time to see what's out there. Learn all about online financing as much as you can. And we know that folks are busy. There will always be probably resources online that people can connect with, and no doubt people that they can speak with, that they can actually call up and get their questions answered. And that's kind of where we've come to in this part of the program, Markus. 

I know that you're so fixed, right in the middle of all of these tremendous developments and certainly it’s grown beyond just a cottage industry anymore, crowdfunding has really become front and center. A true option for business owners to consider when it comes to deciding how they are going to finance their next move, whether that means to grow their company or to start up a brand-new venture. 

Markus, if we have folks in the audience who may be interested in reaching out to you, should they have any questions that were unanswered in this program today, how can they reach you?

Markus: Absolutely. And I'd be very, very glad to continue the discussion. You can find our website at crowdvalley.com. On our website you will find a lot of research that we published, white papers, different case studies, different tutorials, which is our commitment for essentially generating educational material in this market, but also providing statistics on some of the activity that we've got. My own details, you can reach me at markus@crowdvalley.com. It doesn't matter how you spell it, it will all reach me anyway. Or then just get in touch with our team at info@crowdvalley.com.

And really, a lot of the work that we do is fostering this discussion around how these online financing marketplaces, both equity and debt, and cross various different asset classes, how those are changing the very practical things that business owners, but also different types of investors and lenders, go through. So in that discussion, if there's anything that I can do to be of service or helpful in, then I'm very happy to have that conversation.



Jeff: We appreciate that, Markus, very much, that offer to do that. And I hope that I can have you back on the program soon because I know that there is a lot of information we have yet really to cover. And because of the developments in crowdfunding as a financial resource for so many business owners out there, regardless of your stage of business ownership, there are more and more developments coming along, practically on a regular basis now. And so I'd like to be able to have you back on the program again.

Markus: Thank you, Jeff, and I’d definitely love to be back here.

And I'm not saying that once you see cash then you go all in, but rather research the portals, research the actors, research what they've been doing, what their diligence process is, how they handle the process, what fees they take.


Jeff: Thank you, sir. That's Markus Lampinen, he is co-founder and CEO of Crowd Valley Incorporated in the San Francisco Bay Area. I hope that you enjoyed this program. I know that I did. And I hope that you tell a friend about "Deal Talk." In addition to morganandwestfield.com you can find us on iTunes, Stitcher and Libsyn. "Deal Talk" has been brought to you by Morgan & Westfield, the nationwide leader in business sales and appraisals. Learn more at morganandwestfield.com. My name is Jeff Allen, until next time. Thanks for listening.

While we take reasonable care to select recognized experts for our podcasts please note that each podcast presents the independent opinions of such experts only and not of Morgan & Westfield. We make no warranty, guarantee, or representation as to the accuracy or sufficiency of the information provided. Any reliance on the podcast information is at your own risk. The podcast is for general information only and cannot be considered professional advice.
 
 
Resources (All references mentioned in the show)

Key Takeaways

  • A company’s intangible assets are critical in the appraisal of startups or early-stage businesses. The most important intangible asset is the management. You can have the best idea in the world, but “without proper execution, you're absolutely nowhere.”
  • The most important value driver in a startup or early-stage business is traction – the momentum or progress your business has made.
  • When seeking business financing, entrepreneurs should consider private equity or venture capitalists more than banks.  Unlike private equities, banks don’t necessarily add value to your startup or early-stage business.   

Read Full Interview

Jeff: Evaluation may be the last thing on your mind if you've been in business for a short time. But my guest is here to explain why it's important even for the youngest companies. If you're the least bit curious about how a professional valuation might help your new business, you've come to the right place.

From our studio in Southern California, with guest experts from across the country and around the world, this is "Deal Talk," brought to you by Morgan & Westfield, nationwide leader in business sales and appraisals. Now, here's your host, Jeff Allen.



Jeff: Hello and welcome back to the web's number one content source for small business owners committed to building a business for eventual sale. Here on "Deal Talk" it's our mission to provide information and guidance from our growing list of trusted experts that you and all small business owners can use to help you build your bottom line and improve your company's value.

We know that many listeners to this program "Deal Talk" have their own businesses that are just getting off the ground or starting to show their first signs of their measurable growth. If that's you, congratulations. And since we're all about helping you raise the value of your company, we wanted to have someone join us who can talk about working with young businesses, startups or at least age ventures etc., to help them establish their values at an early stage. And to do this I'm happy to be joined by Mr. Pieter Stam, a professional business appraiser who specializes in valuations for newer companies. And he joins us from his office near Amsterdam in the Netherlands. Pieter Stam, welcome to "Deal Talk," sir, it's good to have you.

Pieter: Thank you very much. Thank you.



Jeff: Pieter, let's start by talking a little bit about you. There in the Netherlands we don't have a lot of contacts from the program. We've interviewed a couple of valuation consultants and also professionals in the M&A space from your country recently on the program, but let's learn a little bit more about you and what your area of specialty is, and the companies that you help as well.

Pieter: My background is basically I used to consult companies in turn around management and how to recover or restructure assets. After my masters I was basically headhunted to value companies in all stages of their life cycle. Particularly what I do is I try to simulate in a way the future. For that you need to have some of course … the normal … this kind of cash flow modeling. But also you have to put in strategic knowledge. Where do you think the company can be in a certain amount of time, and what is a normal horizon?

If you take a look at the whole value of a company, you subtract the debt and the assets, you're basically stuck with the intangibles.


Jeff: Why should the owner of a startup venture or an early stage business have their business appraised at such an early point in its existence?

Pieter: The most straightforward answer is probably to seek financing. But that is not nearly the most important thing. There are two things that I think that are really important. If you're at the very early stage, you have to make huge decisions. How will I enter the market, what is the market, who are my customers, etc. No valuation behind it. It will give you support with the strategic choices you have to make basically. 
And on the other hand, if you're still in the early stage but you already invested a lot of effort and resources, it's a way to value these efforts. And sometimes you want to take off shares from the other shareholders and you have to have a point in time to know what is it worth. And I think those things are really important because, for instance, what I tend to do is a majority of the time I do just discounted cash flow models. And sometimes enrich it with a Monte Carlo simulation.



Jeff: Tell us what that Monte Carlo simulation is. We've heard it discussed here before, but if you could provide us with some information as to why that's important.

Pieter: The Monte Carlo is a place in Monaco and they're famous for their big casinos, and that's where the name is coming from. It's like rolling the dice. If you have two dice in your hand the biggest chance that you throw is seven. But what happens if you throw a five or an eight? If you have a large cash flow model with a lot of uncertainties, you can simulate them.

So you can say, "Probably my market is growing with X rate, or my customers I will penetrate a new market so I expect." But what happens if those things aren't playing out? So you can say, "This is the bad case and this is the best case." So you know the bandwidth of the value of your decision making. And of course it's not like a hardcore science, but it gives you the idea and some know-how, which are good decisions and what's the impact of it.



Jeff: Pieter, can you tell me if the act of having a business valuation itself, the process of having a business valuation, that first one, is that something that can actually not just result in improved value but can that actually improve the value of a company itself if a company has taken the time to have their business appraised right from the start?

Pieter: Yes, definitely, because if you know the choices that you can make, all the possibilities, and you get consoled about those options in an early stage. And that's very difficult, because in that early stage businesses don't have money. But if they seek finance, and what we see here if you want finance you want to get finance from a bank, for instance, which I don't recommend for any early venture by the way. They want to have something more than just idea. The banks they need to have value. 

So in that whole process of putting a value on their intangible assets, in a way it's just an idea or it's just a group of people that are very intelligent. Even though they're probably very skilled, they still have to know what the result will be in a way from their decision making.



Jeff: So the intangible assets that really you're measuring in terms of value and providing that valuation to them, these are even more important aren't they when we're talking about appraising new, young, early stage businesses or startups. The intangible assets are probably more important in this particular case than they would be for an established company that has been in business for 10, 15, 25 years is that right?

Pieter: Yes, that's definitely right. When I appraise the business I tend to appraise the asset. I'm not interested in their depth structure or their... I tend to first take a look at, all right, what are just the assets worth, besides the whole structure having access to grapple the market or whatever. Because the assets itself and particularly the intangible assets, that is the real value of a company.



Jeff: We've been told that valuations are not necessarily just a measure of past performance and of the value of a company to the present date, but rather also forward looking as well, and can include potential... Is that true? Explain how that works.

Pieter: A lot of people that tend to look at a company, this is their track record. I expect the track record to be the same. And if the GDP is growing it will grow at the same rate. For instance, that's what you see with more mature companies, but with a startup or even an early stage venture you see that you have to anticipate on the future because you don't have that much history. And a majority of the time they're not making a profit. You can simulate what happened to see... For instance, we see when do they have enough mass to start making a profit. And you can use basically a multi-current simulation for that. 

Sometimes I have to tell people, "I don't think your idea's good enough. Or your business model is just broken. Maybe you should do something different. Be surprising. Enter the market in a different way." Sometimes I see businesses, they reinvent something but they don't do it better. They think they could do it better but the customer isn't thinking that way. So for me one of the most important factors is probably for early stage ventures that they have already traction, like the first customers. If it's a really early stage you can still tweak the product or the service. I think that is definitely important if you want to...



Jeff: Let me ask you this, Pieter Stam, what kind of reaction do you get from those individuals that you speak with, and you have to meet with these people and discuss what's driving their business, or discuss their product like you talked about or their service. And you tell them, "You know what, this isn't really working, or the potential here for failure certainly does exist if certain things aren't corrected." 

What kind of response do you get from them? Are people generally disappointed? Are they genuinely interested in hearing what you have to say? Just kind of give us some kind of indication of what reactions you've had to deal with in the past.

Pieter: Of course people are a bit disappointed, because they put a lot of effort in it and a majority of the time they're really passionate about the product. But if you report in such a fashion that they understand every step of a simulation of the valuation process you can point out the weaknesses. And of course they're not only weaknesses, sometimes the idea is great but the management team, for instance, is not good enough. There's always a way that they can stir it a bit. But sometimes they put in a lot of effort and it's worth basically nothing.

A good plan needs good execution. But along the way you find things that you have to change, or the market is changing, or you are changing. So you always have to keep in mind what is the dot on the horizon where I'm going.


Jeff: And it's what it is. And they continue to move forward with their original plans whether or not their plans would be able to result in anything tangible in terms of success. This is a great place to stop for just a moment because I want to take a break. And when we come back, Pieter, I want to be able to chat with you about value drivers and about these intangible assets in a little bit more detail to kind of get your take on some of the drivers and intangibles that you actually talk with these companies about and how they can start to make efforts to improve the value of their company and steer the ship in the right direction. My name is Jeff Allen, and I'll be back with Pieter Stam. He is a valuation professional based in the Amsterdam area in the Netherlands, and we'll continue our conversation when "Deal Talk" continues in just a moment.

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Jeff: My name is Jeff Allen with Pieter Stam. He's a professional valuation consultant coming to us from Amsterdam today. And we're talking about the importance of valuations, business appraisals for new, young companies. We talk about oftentimes valuations, the importance of value drivers and we're going to start this second segment of this program by talking about that right now. 

Pieter, you've mentioned that when you're called in to appraise these businesses you're going to visit with these clients and then you will sit down with them oftentimes and provide your feedback, and let them know about ways that they can approve some things that they need to do in order to gain the growth, to get on the path, the trajectory to growth in the future. Let's talk about some of these important value drivers right now for young companies. I know that all businesses are different, but are there some value drivers that you come back to again and again to discuss with these companies and things they really need to focus on in the beginning?

Pieter: Yeah, definitely. And it's not that special. The most important value driver I guess is traction. Do you have first customers, do you have first feedback on your product and services? The whole idea... Can you keep on improving what you're doing? The majority of them that's the most important thing. 
And of course you have things like patterns, you have maybe brand names, or like proper social media exposure. Those things are important to create a buzz around you. But the most important thing is probably traction. You just need to have your first customers and have your first starting up the whole business. Because you go from an idea to have them serving and resolving problems. That is probably the most important thing.



Jeff: One of your specialties is obviously it's appraising intangible assets and you explained why that is very, very clearly in the first segment of the program. What are some examples of intangible assets that you can describe for us?

Pieter: I think the most important intangible asset is probably the management. And it sounds really strange because you can have a great idea but without proper execution you have nothing, really have nothing. And there is a famous quote and it's called betting on the horse or the jockey. The horse is the starter basically and the jockey is management. You can have the best horse in the world, you have the best idea, but without proper execution you're absolutely nowhere. 

That's probably the most important intangible asset. But of course you have the whole process of R&D or the whole being able to attract new challenge. Those things are really things that you don't see on your balance sheets basically. If you take a look at the whole value of a company, you subtract the debt and the assets, you're basically stuck with the intangibles. And from there on you see that the whole things like the know-how, the good will, the brand name, the reputation. And when someone wants to buy a company or you want to have new shareholder, or getting equity financing, those things matter a lot.



Jeff: Let's go back to what you'd mentioned a short time ago about new companies and that they should not seek financing from a bank in the beginning. Can you tell us why that is?

Pieter: That's because banks they don't add any other value, and a majority of the time they're just money. And money by itself is not interesting at all. It's like if you have a venture capitalist, or private equity, or whatever, if they invest you can access their networks. Maybe they will be able to give you the first traction. It becomes easier to enter the market. And there's scientific evidence that companies that get funded by private equities they probably enter the market quicker, they are more successful. Because private equities, when they do their due diligence and they think, "We can make a profit out of it," that is by itself already a value a driver. Because if private equity doesn't want to invest in it, probably it's not a good company.



Jeff: This conversation with Pieter Stam has really been very interesting and very eye-opening indeed from someone who obviously, a former new startup business owner myself, it's been many years in the making now. But had I known then what I know now I probably would've been a much smarter individual from the beginning. Pieter, I want to wrap up this segment of "Deal Talk" by asking you if you can leave us with a few parting words, some final thoughts, recommendations that you have for new business owners, new entrepreneurs. Maybe they've just launched their companies, maybe they've been in business for a year or two. What can new businesses do now, young businesses do right now to work toward improving the value of their companies at the very early stages?

Pieter: The thing with the valuation of a company, in a sense it's very subjective because, like I mentioned before, if you get backed by private equity they provide more value than just money. They help you in other ways if they're the proper investor. 

That's a thing that probably you have to always keep in mind. So if someone gives you a value of your startup, or your early stage venture, or whatever, you always have to take a look at how they made the valuation. Because in my case I make a forecast. And if you take a look at the forecast you have to make a lot of assumptions. And if he or she is doing a good job the assumptions make sense, you can learn a lot from a valuation in such a fashion. 

If you do it at an early stage, which is quite funny if you're an early staged venture. You can still pull some strings to redirect your venture and do maybe some bit of difference to teaching decision making. And I just think that a good plan needs good execution. But along the way you find things that you have to change, or the market is changing, or you are changing. So you always have to keep in mind what is the dot on the horizon where I'm going. And I think that's probably the most important thing.



Jeff: Pieter Stam, this has been, like I said, an eye-opening conversation. We appreciate your time. We really enjoyed it. And hopefully in the near future we can have you back on the program again. Thank you so much once again for joining us today.

Pieter: Thank you.

If someone gives you a value of your startup, or your early stage venture, or whatever, you always have to take a look at how they made the valuation.


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Key Takeaways

  • Increase customer diversification. You are decreasing the value of your company if your business depends entirely on certain contracts.  With a diversified customer base, you are able to lower the risk involved in buying your business. 
  • Develop recurring revenue streams. An appraiser will typically put higher value on a recurring revenue stream than on non-recurring.
  • Include assignment clauses on all key contracts. There should be an assignment clause in your key contracts specifying that in cases you sell the majority of your company’s assets, you can assign those contracts to the buyer.
  • Reduce discretionary earnings. Buyers expect a minimum amount of discretionary earnings in your business.
  • Increase profit margins. Profitability tends to be more important than revenue.
  • Get organized and stage the business. Just like when selling a home, it is essential that your business is organized and staged for the sale. As what Anja emphasized, “You never get a second chance for a first impression.”
  • Clean up pending lawsuits. Always consult an attorney whenever you make legal decisions because “every situation is unique.”
  • Be a big fish in a small pond. Position your company as a leader in any aspect of the business – you could be the best service provider or maybe the one with the best technology.
  • Spread know-how. When thinking of exiting your business, it’s important to spread the “know-how” to key empoyees. Potential buyers want to be assured that the business can continue to run without you at the helm.
  • Create golden handcuffs for key employees. You may structure the sale in a way that you allot a certain amount of the sale proceeds to your key employees.  That way, you get the support of key employees and at the same time, you “alleviate” the fear of the buyer about key people leaving when you walk out the door.

Read Full Interview

Jeff: They say the best things in life are free. So if you're interested in 10 free tips to help you increase the value of your business from a highly successful certified business appraiser, you've come to the right place.

From our studio in Southern California, with guest experts from across the country and around the world this is "Deal Talk," brought to you by Morgan & Westfield, nationwide leader in business sales and appraisals. Now, here's your host, Jeff Allen.

Jeff: Hello, and welcome back to the web's number one content source for small business owners committed to building a business for eventual sale. Here on "Deal Talk" it's our mission to provide information and guidance from our growing list of trusted experts that you and all small business owners can use to help you build your bottom line and improve your company's value.

Whether you have recently had your business appraised or not, you've picked a great show to listen to, because if you're like most of us, you want to know concrete ideas that would help you to lift the value of your business. On this edition of "Deal Talk" we have not one, not two, but 10 ways to increase the value of your company. And to explain what these ideas are, I'm joined by the certified business appraiser who put this list together, Ms. Anja Bernier, the managing director of Efficient Evolutions LLC in Boston. Anja Bernier, welcome to "Deal Talk," good to have you.

Anja: Thank you very much.

The idea here truly is that you try to build a customer base that's not specific to a particular industry, so that you have more of a cushion to any events that hit particular industries very hard. 


Jeff: You have written a document here called “10 Ways to Increase the Value of Your Company.” And I would like to go over that with you today and give our listeners a chance to understand what it is that they can do or what they need to be thinking about. Let's go ahead and we'll take these one by one if we could.

Anja: OK.



Jeff: Item number one in your list, increase customer diversification. Now, if I'm a business owner and I've had my business for many years, I may be happy with my customer base or kind of what I'm doing, but why is that important?

Anja: Customer diversification is really one of the factors that play a crucial role in the value of a business. And also when it comes to the perspective of a buyer on what the perspective is on how much risk is involved in buying your company. And obviously risk is a major factor in any valuation. The reason for that is that a high customer concentration typically obviously means that your business is entirely dependent on certain contracts. So as a buyer and an appraiser will have the same perspective, the question always is what happens if this contract goes away? 

And you have to keep in mind that as a buyer the perspective or the suspicion, I should say, will always be that a lot of these contracts that are focused on just one customer entail a very close personal relationship between this customer and you. And since you as part of the exit planning will be leaving the company, a potential buyer would be very concerned that that specific customer will leave because you are leaving, because they're really with you because of you. So that is the major factor, a major issue.

And the idea here is that the more customers you have the less likely it is that they're all going to leave at the same time. Think about it, what are the chances if you have 50 or 100 different customers that they all decide within the first 12 months of the acquisition to leave? However, if your business really mostly consists of two, three customers, chances of one or two of them making that decision, therefore in a sense ruining the business, are quite high, so that would significantly decrease the value of your company.



Jeff: I think it's a very, very important point to make, and one too that it goes beyond making every effort possible to keep your happy, satisfied customers, long-term customers with you, keep them in the fold. But you talk about increasing the diversification. Can you give us an example maybe to crystallize more the idea of diversified customers, what it exactly means as far as diversifying? We're talking about obtaining new customers through different industries or product offerings that you might have. Is this talking about maybe trying to work sales channels by increasing your customers maybe in a certain part of the country, for example?

Anja: Yeah, sure. The answer here really is all of the above. I use the example of 9/11 and what happened to companies that primarily sold to the airline industry. If you were a business at that time that was entirely focused on that industry, with the airline industry going into a tailspin after 9/11 you really had no option. A lot of them went out of business. So the idea here truly is that you try to build a customer base that's not specific to a particular industry so that you have more of a cushion to any events that hit particular industries very hard. 

The other ideas, today, it's a global world and few recessions hit worldwide with the same intensity. Sometimes it's even possible America might be in a recession and Europe might not be. Oftentimes, obviously, they coincide, but the severity is not necessarily the same. So there's another thing, if you have a product or service that can be sold worldwide it certainly would be a good idea to be looking at worldwide diversification.

And also, coming back to having high customer concentration, were the slow ones. Obviously some businesses will find themselves in this situation where that sort of just, it is the way it is. That is their business and it's very hard for them to change that with short notice.

That said, if you are in a situation where you do have high customer concentration, what you should try to do that you mitigate the risks associated with that, but at least tying these people to you either contractually or by certain services. I had a customer a few years ago, it was a printing company. And what they would do, they were offering their customers free printing plates in exchange for the customers to agreeing to a multi-year contract. Without that offer they would not have agreed to that. But by having them locked in into a multi-year contract that made them more attractive in a sales situation.

Or another customer developed an inventory management software that they sold to their clients at a very low price, essentially at break even. And just to make sure that by using this software the customer became more tied to them and make it more difficult for them to leave, because they would lose access to the inventory management software. And I should add, inventory management software was not the main business that this customer had. They just developed this as a tool to tie people to them. 

So there are many ideas out there that you can implement. You have to think about what industry are you in, what can you offer to your customers to entice them to either sign a multi-year contract with you, and or to tie them to you by other means with the example of the inventory management software. They simply can't leave because they really need access to that inventory software program.



Jeff: So really talking about value added services there to help in retaining those customers. We're talking about the 10 things that you can do, 10 ways to increase the value of your company as you are preparing to sell it, whether that be three years, five years down the line, whatever the case may be. And Anja Bernier is our guest today here on "Deal Talk." Number two, develop recurring revenue streams.

Anja: Sure. That's a perfect example. Buyers love recurring revenue streams. And when it comes to valuation, I can tell you an appraiser will put higher value on a recurring revenue stream typically than on non-recurring. Non-recurring meaning it's the type of revenue stream, it's generally one. And each year you sort of have to go out and win new customers again. Recurring revenue stream really means that you have an existing customer base that you can count on. 

Giving you an example. Hewlett-Packard sells you that printer for next to nothing, but by doing that they sort of know you're locked in and buying their ink. And where they're really making their money is the ink. So by knowing how many printers they've sold there's sort of a recurring revenue stream coming from the ink. Same is true with Gillette, with razor blades. Given the certain amount of razors being out there in the world, there's an expected revenue stream from the blades. 

For example, I had a client a few years ago in the home automation field. And at some point the owner of that company realized that it made more sense for him to install alarm systems at below or break even pricing, because that would allow him to then sign them up for alarm monitoring subscriptions. And that said, if you could think about it, installing an alarm system is a one-time thing when a house is built, and then there's no more revenue from it. It's a perfect example of having to go out again and find a new customer once you finished the installation. 

However, getting a subscription to allow monitoring means you have a recurring revenue stream. Every month you can build these customers. And in this case he was even able to then turn around and sell these contracts to some of the large national alarm monitoring companies who pay a lot of money for buying up these kind of contracts. That definitely increases the value of your company significantly if you can think of ways of creating recurring revenue stream. 

For example, if you have more on the manufacturing field, think about, for example, adding maintenance service plans to your portfolio. A good example is I recently bought a new QuickBooks subscription and they make you sign up for signing where you get support every month so they can bill you. Or maybe it's not QuickBooks. There are many examples like that where you can think of something where you really get access to a revenue stream that comes every month instead of just being a one-time deal. Buyers love that.



Jeff: That'll take us to number three. We were talking about contracts just a moment ago, so we'll segue into the next one: have assignment clauses on all key contracts. What do you mean by this exactly, Anja?

Anja: This is really crucial, particularly for smaller businesses. And with smaller business, I really mean businesses realistically that have a value in a sale of less than about $10 million. Because about 90% of these will be sold in so-called asset-based sales, meaning technically you're not selling the company, the legal sale, whatever it might be, an LLC or an S-Corp. What you're really selling is the assets of the company, your tangible and intangible property. It could be customer contacts, it could be actual machinery, whatever it is. But you retain the legal shell of the company.

This causes an issue, because if you have contracts with your customers, or any other material contracts that can be assigned, the buyer of the company has to go out and ask these customers to re-sign contracts, which many times they just simply probably won't do. However, if you have an assignment clause in all of your material contracts specifically say that in cases where you sell the majority of the assets of your company you can assign these contracts to the buyer, that'll make the process much easier, much smoother, and again, it will have an impact on the value of your company.



Jeff: That's huge. And just think about it again. Any time you can make the situation easier on the buyer, and there is less to do or less for them to worry about in this process, and they know that once the business transitions over it's going to, number one, of course, it's going to elevate the value of your company, but it is going to create for a much smoother process. There's going to be fewer headaches down the line, and less of a chance that's someone's going to come back to you later on and say, "Hey look, we need your help doing this. This is something we can't figure out."

I've got Anja Bernier on the line with me, president of Efficient Evolutions LLC. She's a certified business appraiser and CVA as well. You're listening to "Deal Talk." My name is Jeff Allen. We're talking about 10 ways to increase the value of your company, and this is really giving you some things to think about as you prepare to sell your business down the line. It doesn't matter whether that's going to be in three years or maybe even 23 years from now. Number four on your list of the top 10 things to do here: reduce discretionary earnings, Anja.

Anja: Yeah. That is, obviously, once again, one of the ones that apply to almost any company. And because we're obviously talking here about privately held companies. As we all know the typical privately held company has a certain amount of what I would call most people in the industry called discretionary earnings, which means it's the kind of expenses and thus earnings because they really create a benefit to you as the owner of the company that are maybe technically speaking are not 100% business-related. Let's just leave it at that euphemism. 

It could be travel expenses where you may or may not have gone to a conference and stayed a few more days. It might have been a meal that you may have spent with a client but you may have also taken out your wife, who knows. Those are just some of the examples. Or you may employ a family member who doesn't actually work there, or you're paying a family member above market rate. So those are the typical examples of discretionary earnings to an owner. 

And what it really means is if you have a lot of discretionary earnings, any buyer will sort of expect there is the minimum amount of discretionary earnings in there, and would probably during the sale process, the opening, sort of indicating this and that areas of expenses that would go away if you leave the company. However, if you really put that to an excess, especially if you have a cash-based business and you go even further that you don't record all the cash that comes in, something I certainly don't recommend to begin with. But if that's something or a practice that you have been using, think about it this way: 

If you're selling your company, on average you'd probably get about $3 to $5 for every dollar in earnings that you generate. That's a very rough ballpark. Of course, it could be more or less depending on the specifics, but let's just stay with three to five. So for every $3 to $5 you show on your tax return you then only have to pay, if you show it on your tax return for two years given the maximum tax rate being 40%, which means 40 cents on every dollar. So even if for two years on every dollar you pay suddenly 40 cents taxes, which is unlikely. Most companies don't even pay the maximum tax rate, you would end up paying 80 cents over two years for every dollar. But you get during the sales process between three and five for every dollar that you can prove exists. 

And those are just some numbers that are important to keep in mind. And this is actually where in many ways I have to say blows my mind on how difficult it is for a lot of business owners to just go ahead and do it. Put it in the tax return, prove that it exists, because again, it's 80 cents in expenses whether it's a potential gain of several dollars. It just really makes sense to do that. 

If, for whatever reason, you can't clean up legal issues before you put the company up for sale, at least be open and upfront about it. Disclose all these issues right away. Have the paperwork ready. Very few issues truly will derail a deal as long as you're open honest about them. 


Jeff: Ten ways to increase the value of your company. My name is Jeff Allen. I'm going to continue my conversation with Anja Bernier, President of Efficient Evolutions LLC when “Deal Talk” returns after this.

If you'd like to share your knowledge and expertise on any subject related to selling businesses or helping business owners improve the value of their companies, we'd like to talk with you about joining us as a guest on the future edition of Deal Talk.

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Jeff: Jeff Allen with you today. Anja Bernier is my guest, and we're talking about the 10 things that you can do as a business owner to improve the value of your company. And that's kind of with your eye on selling your business, and all of us kind of look forward to doing that at some point one day. And Anja Bernier, we really appreciate you joining us today on this program.

This list is something that you came up with a few years ago, and we're kind of going by each one by one. And we've left off on number five. We still have a total of six steps to talk about too, six things here to talk about. Number five, increase profit margins. This sounds simple enough, and it sounds like something we should all be mindful of all the time.

Anja: Absolutely. It seems like a no-brainer, but the reality of the situation is that oftentimes what I see is that business owners lose sight of the fact that driving sales while at the same time recording decreasing profit margins will not do you any good. And that's really the sum of it all. Oftentimes what I see is that business owners will go after contracts just to record the additional revenue without really thinking through how profitable is this additional contract.

And what you should keep in mind is that from a buyer's perspective, profitability tends to be more important than revenue. Meaning that for a typical buyer, a company with $6 million in revenue and $1.2 million in profits, so 20% profit margin, is more attractive than a company with $7.5 million in revenue and $900,000 in profit, so 12% margin. So just because you increase revenue does not mean you're necessarily increasing the attractiveness of your company. 

So what you should really be doing is think very hard and long about how do you monitor additional revenue. You should also make sure that, for example, if you have a sales force, that you have incentives plans in place that reward your sales force for getting contracts with higher profit margins and vice versa. In a sense, penalize them for bringing in low margin revenue. So you shouldn't be basically instructing the sales force go out and sell, you should be really more specific about this and say, "Go out and try to get highly profitable business for us."



Jeff: This is something we've talked about on the program before, really apples and oranges when you get right down to it, revenue versus profit margins. Increase those profit margins and work at it. And I really like the idea, too, of incentivizing the sales force in order to help you accomplish that mission. 

Number six, get organized and stage the business. This sounds like something that many people might do in their own homes when they're getting ready to sell their home and put it on the market. You're going to stage that home. Is it the same thing with staging the business as well, Anja?

Anja: Absolutely. It really is always true, you never get a second chance for a first impression. And the point is I had walked into many businesses where the office of the owner literally looks like a bomb just exploded there. Or you walk into the cafeteria, it's kind of dirty, it's worn down. It just leaves a very poor first impression for any buyer to walk through. It feels like half the wire is hanging down from the ceiling, the floor hasn't been swept in a while. 

Another factor is please do make sure that you've posted all information required by the Department of Labor. Make sure there are no offensive posters, whether that's posters or screensavers. Because the one thing you have to keep in mind, it is the 21st century. Even though you in the past may have thought, "You know what, what's the big deal with having posters of half nude women hanging on the wall? The employees have that." That is unprofessional in today's world. 

First of all, it's illegal. It's considered a hostile work environment. But secondly you do have to keep in mind, and I'm not saying this because I'm a woman, because quite frankly when I represent the seller I don't have to work there. But what I can tell you that the buyers and even if they're male they'll look at it like saying you're not running a tight ship. You're allowing things to happen in your company that are illegal. And so do make sure that you pay attention to these kind of things.



Jeff: And it seems, again, like a no-brainer, but really it is true and I've been in these types of businesses before, Anja, as well. And you're absolutely correct; it is very surprising in this day and age when you walk into an environment that is unkempt that looks like it's quite frankly fallen into a state of disrepair regardless of what the numbers show.

Cleaning up the office and staging it or your workplace is not the only thing that really needs spritzing up. But you also need to clean up pending lawsuits. This seems to be a no-brainer, but it's possible that so many people can leave their dirty laundry behind. This is a real big problem that can really quite frankly pose a tremendous hurdle to a sale going through.

Anja: That is very true. Obviously there are many reasons why people may drag their feet on solving legal issues. It can be a lawsuit, it could be any other issue. And I should also say that before making any decisions about legal matters you should obviously always consult with the attorney because every situation is unique. 

But that said, in general broad terms buyers really do not like open litigation, open legal issues. It's going to be a major turnoff, it's going to decrease the value of your company. At minimum what it's going to do is drag out the due diligence period. And if any business intermediary like myself will tell you, dragging out the due diligence period is never a good thing. Time is the enemy of every deal. So you want to be hopefully in a position where you have resolved any major issues. 

That said, if for whatever reason it might be you can't clean up legal issues before you put the company up for sale, at least be open and upfront about it. Disclose all these issues right away. Have the paperwork ready. Very few issues truly will derail a deal as long as you're open honest about them. And also, if you can, present a path on how to resolve them. So do get your attorney involved. Be ready for this. And do not try to hide any issues like that.



Jeff: Talking about the top 10 things that you can do to improve the value of your company prior to sale. Number eight, be a big fish in a small pond. That's something that I feel comfortable doing. I don't know about you, Anja, but exactly what do you mean by this?

Anja: What I mean is that typically speaking when you're being acquired, the preference typically is that you find a strategic acquirer who would buy you out. Because strategic value is typically the highest value that you can achieve for you company. And what strategic usually do when they do so called roll-ups, meaning they look around and see the companies that we want to add to our portfolio. They usually go after the well-known entities first. So you do want to be a known entity, a big fish in your small pond.

The problem is if you get into a bigger pond, because if you're privately held, smaller abilities, smaller scale. It's very hard to be a noticeable entity. So do find yourself a pond in which you can get well-known, where you can build yourself a position where you are the known leader in something, the known expert, whether that's the best service provider, the best technology, whatever it might be. 

And, ideally, also build up a portfolio of proprietary know-how or intellectual property, whether that's patents or something like that. Because that will also be something that will make you more attractive. I give a very concrete example. You might be a manufacturer of ozone monitoring and then controlling equipment. That's a narrow field, so a small pond compared to the large pond of scientist and instrument manufacturing. 

Ideally you would become the known expert in manufacturing or zone manufacturing and controlling equipment. And then you try to expand your customer base, either geographical or industry diversification. So that would really be an ideal strategy where you address this point of being a big fish in a small pond. And also the very first point we've discussed today about that you should always try to broaden your customer diversification.



Jeff: And you can do that by virtue of being this go-to expert, someone in your field I think is very important indeed. We got two left here. Number nine, spread know-how.

Anja: That is something that also applies to most privately held businesses. The issue with the typical privately held company is that most of the know-how and expertise is concentrated in the owner. But think about it, you as the owner, you're trying to sell the company. So realistically you will be leaving the company soon. So the more of a concentration of customer contacts, then their contacts and know-how is on you, the more of an issue you're creating, and this, again, decreasing the value of the company because the buyer will perceive that as a risk. 

The way you may look at it is like, "Well, it's not a big deal. I'm willing to stay on for a certain amount of time to transfer all these contacts.” The buyer will look at it and say, "Well, what if I buy the company next month and the next day this guy gets hit by a bus? Or this person isn't cooperative during the transition process?” So a buyer isn't just going to look at it and say, "It's not a big deal; we'll just do that in the transition period." A buyer is going to look at you and say, "You know what, that's high risk. All of it is really concentrated into this one person.” So in the years leading up to the sale, do yourself a favor, start spreading know-how to your employees. 

It comes back to, again, like we were saying before, if you have 50-100 customers, it's unlikely they're all going to leave at the same time. The same is true with employees. Obviously, you don't need to spread your know-how to 50 different people. 

But let's say even if it's three to five, it's very unlikely from the perspective of a buyer that three to five employees will all leave within a few months after they take over the company. So that's much less risk than having all the know-how concentrated in one or two people. So you should definitely start spreading it and make sure that the company can literally run without you, even probably before you sell the company. 

The ideal company to be sold is one that if as of the day of the sale you would literally disappear, it would still more or less work the same way it did before. 



Jeff: And we've come down to the end of our list here, item number 10. We'll review the previous nine here, Anja, real quickly. Number one, increase customer diversification. Number two, develop recurring revenue streams. Number three, have assignment clauses in all three contracts. Number four, reduce discretionary earnings. Number five, increase profit margins. Six, get organized and stage the business. Number seven, clean up pending lawsuits. Number eight, be a big fish in a small pond. Number nine, spread know-how. And number 10, the last item here on our list that you can do as a business owner to increase the value of your company, create golden handcuffs for key employees.

Anja: Yes. This goes hand in hand with the topic we had just talked about about spreading know-how. Typically speaking it's always a good idea to structure a sale in a manner that you set aside a certain amount of the sale proceeds, whatever you feel is adequate. Again, that's very situation-specific. Let's say 5%-10% of the proceeds. And you basically give your key employees incentives, bonuses, that state that they are eligible to receive this share of the set aside amount if they're still with the company 12-18 months after the sale of the company. 

This will very much alleviate the fears of a buyer, of key people leaving. And will basically make sure also that these employees are committed to the sale of the company, say the right things at the right time because they have a vested financial interest in the acquisition going through. Just think about it. For employees a sale of a company and such, or we see acquisition by a new buyer, that's a time of change, a time of uncertainty. They might be afraid for their job. 

So this is a time where you can expect that they may actually try even to, whether it's subconsciously or consciously, sabotage the sale. Because for them it's really better if things stay the way they are. That's safety. That's what people like.

So you want to excite them about the sale. You want to have their commitment. You want to have their support. And by giving them an incentive like that you achieve two goals. First of all, they get a vested interest, like I said, in having the sale go through. And then secondly you alleviate the fears of the buyer that they may leave. So you're basically just achieving two things with one action.


Jeff: You're creating some assurances on both sides that there is going to be a tomorrow, and that there will be a reward essentially for those who stay on board, those among your employees. And at the same time you're providing some assurance to the new buyer that things are going to continue to operate normally with these world-class employees that you have on board.

Anja Bernier, I really enjoyed this discussion. We've run out of time. But what I'd like to do right now is give you an opportunity to just say a little something about your company and let people know how they can reach you. We've got business owner listeners to "Deal Talk" all across the country and in your particular neighborhood as well. How can they connect with you?

Anja: That's very easy. As you mentioned before we're actually located just outside of Boston, Massachusetts. Our company that is focused on buy and sell set representation and business valuation. Typically, the transactions that we handle have a value between $1 million and $20 million. That's our specialty across many industries.

The best way to reach us is either our website, which is efficientevolutions.com. And/or, obviously, by giving us a call, and the number would be 781-806-0880. But again, you know, all of the contact information is on the website, and that is efficientevolutions.com.



Jeff: There you have it. Anja Bernier, president of Efficient Evolutions LLC. Thank you so much for agreeing to join us. We enjoyed having you on this edition of Deal Talk.

Anja: You're very welcome. 

Buyers love recurring revenue streams. And when it comes to valuation, I can tell you an appraiser will put higher value on a recurring revenue stream typically than on non-recurring.


Jeff: Make sure you tell a friend about "Deal Talk." In addition to morganandwestfield.com, you can find us on iTunes, Stitcher and Libsyn. "Deal Talk" has been presented by Morgan & Westfield, the nationwide leader in business sales and appraisals. Learn more at morganandwestfield.com. My name is Jeff Allen. Thanks so much for listening. We'll talk to you again soon.

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