Health and fitness is just as important to our businesses as it is to our bodies, so why do so many business owners overestimate the financial health of their organizations? Is it possible that the numbers in your ledger may be hiding fiscal concerns that, if not addressed, could have a long-term negative impact on your company’s value? It may be time for a comprehensive assessment of your financials, but how do you start the process, and what should you look for? Gabrielle Luoma, Chartered Global Management Accountant, CPA and owner of the firm GMLCPA LLC in Tucson, Arizona, will let us know.
Depending upon their goals and what they're trying to accomplish, that's usually the first thing that they start to look at, is it profitable, and is this a good idea.
- Gabrielle Luoma
Gabrielle: Thank you so much for having me. I'm looking forward to our conversation.
Jeff: Thank you Gabrielle. Tell us a little bit first of all about what a chartered global management accountant is and does.
Gabrielle: The CGMA is a designation by the AICPA, and essentially it says that we're qualified to help with managerial type of accounting. And a lot of that is basically your day-to-day accounting and how you handle and manage your business. That's basically it.
Jeff: The one thing that really impressed me about visiting your website, and we won’t talk long about this because I want people to be able to go and visit at their leisure when they have some time to do so, Gabrielle. But the one thing that I noticed is that you have a unique, small team approach to the services that you provide. You're not just a CPA. We've talked about that, chartered global management accountant. Really, you are providing if you will some consultative services to people who come to you that kind of go above and beyond what a typical CPA might do. Am I getting that wrong?
Gabrielle: No, you're absolutely right. Basically what we're looking to do is be that consultant, that ear that most small business owners need. They got into business. They did not go into accounting. And so they're needing that extra support to help their business grow and scale up. And so what we do is provide the whole accounting back office to help them do that, and then take them through the compliance and the tax filings and all those other things, and help them dodge a lot of killer things that will take businesses down. We take by the hand, partner with them, and help them grow their business and scale it in the way that they would like to do it. It's all centered around their goals and what they want to accomplish in their life.
We take by the hand, partner with them, and help them grow their business and scale it in the way that they would like to do it. It's all centered around their goals and what they want to accomplish in their life.
Jeff: Very important stuff. Let's start to zero in on some of this stuff a little bit, businesses, financial future. You really do try to make an effort in addressing this on your website and how important it is for business owners to understand their business' financial health. Let me ask you, Gabrielle, from your experience, do you think that most business owners actually have a pretty good idea of the financial health of their companies, or is it difficult to see the truth through some of the numbers in our ledgers, and our P&L statements and what they're telling us?
Gabrielle: Yeah, sure. I think a lot of companies really don't know where they're at financially. I was doing a Periscope and it was interesting because they were having a conversation about their financial health and where they're measuring their numbers, are they keeping track of things. I had several people actually reach out and say, "I really don't know where I'm at." That is a big problem in small businesses and that's the thing. That's the reason why you have accounting, and that's why you have financials. It's not just for the end of the year tax season, it's for planning, testing, and seeing if what you're actually doing is profitable or not. And so we break down those numbers, break down those processes, and help business owners really decide if the value that they're bringing to their customer is actually profitable or not.
Jeff: How true is this statement that many business owners tend to overestimate the value of their companies because they don't have a clear understanding or grasp of the accounting procedures, or what the numbers may not in fact be telling them?
Gabrielle: Right. I think that's true. A lot of times there's an emotional attachment to your company. And you know all the blood, sweat, and tears you had to go through in order to create that company. And so they don't take into consideration what their true value would be when they do go to sell. And so they get before a CPA or an expert in valuation and they get bad news because they aren't measuring the right things. And so if you're looking to eventually sell you should be looking at those and measuring those as you grow your company to really see what you're going to be selling in the future.
I had several people actually reach out and say, "I really don't know where I'm at." That is a big problem in small businesses and that's the thing.
Jeff: Let's figure out then what a business owner has to do or where they should start in the assessment process to start to kind of drill down to see where their issues lie and what needs to be fixed in order to lift that value up to a level that they think their business probably should be.
Gabrielle: The very first thing that most people interested in buying are looking for a profitable business. Depending upon their goals and what they're trying to accomplish, that's usually the first thing that they start to look at, is it profitable, and is this a good idea. Of course usually the numbers do not lie. And so once you look at profit and determine that this is indeed profitable then you go and you start to drill down into the figures as far as the cost of the product to make it, basically the cost of doing business. You start to drill down further and further. You would jump to the balance sheet, make sure that the assets that are on-hand are going to be continuing to produce at the level that they're expected to, and are they fully depreciated, are they 10-year assets that only have a year left maybe, are they going to have to reinvest into this business to keep it going at the speed that it currently is. And you also need to look at your customer lists and things like that to see if there's true value in that customer list and to see if you can grow other lines of services to those same customers. There's a lot of different things to evaluate when you're looking at the value of this company. That's just a few. Profit and loss, balance sheet, look at your assets, and customer list I would say are probably the top three.
Jeff: You're listening to Deal Talk, my name is Jeff Allen with my guest Gabrielle Luoma. She's a CPA and owner of GMLCPA LLC in Tucson, Arizona. Gabrielle, when you go in and you've been contacted by a business owner and they ask you, "Gabrielle, I'd really interested in having you come in and take a look. Something's not quite right but at the end of the day I'm really just interested in maybe having you do the sanity check for me." What oftentimes do you find through your investigations and going through the books and talking with these business owners do you find is a common weakness that most business owners seem to share, maybe they're not aware of, where you can see that might be contributing to significant losses in those companies?
Gabrielle: I think a lot of times what business owners do is they truly don't understand how to pay themselves. And so there's a lot of co-mingling of funds. That's probably the number one thing that I see in small businesses, and we're talking small, below a million dollars. You probably see a ton of closely owned companies that are co-mingling funds. It's hard to actually see what their profitability is.
There's a lot of different things to evaluate when you're looking at the value of this company. That's just a few. Profit and loss, balance sheet, look at your assets, and customer list I would say are probably the top three.
Jeff: Let me ask you something, when you say co-mingling of funds, is this out of necessity? They feel like they have to take and blend these funds in order to maybe finance the expense of having to pay for equipment, or machinery, or parts, or supplies, or whatever their business might be. Or are you talking about co-mingling in other areas?
Gabrielle: I would say it's in both areas. Lots of times a business owner will have their own personal funds instead of actually loaning the money to the company, they just go buy the asset. Of course you can go back and properly account for that but rarely do they. So you go to their balance sheet and there's a bunch of assets that are missing and haven't been recorded because of an off balance sheet transaction that took place. Then you also have those situations where they're not really sure how to pay themselves. Should they give themselves a pay check, should they be taking draws? And it depends on the type of entity of course but it's a big problem legally if things go south in one way or another. Co-mingling of funds, buying your personal groceries, whatever it might be that would also throw off your financials and not give you very good readings as far as the profitability of the company.
Jeff: Are those easy fixes for you to go in and you sit down with them, and you talk things over, and you say, "No, this is what you're going to do starting next Monday"?
Gabrielle: Yeah, absolutely. We can go through the whole financial statement, income statement pretty much sitting down for an hour and can identify things fairly quickly and say, "This is not what you should be doing. This is not going to help you. This is how you should pay yourself" - things like that in order to really get them on track. It's a really simple fix but it's not when you are in trouble.
Jeff: Let me ask you this, is it sometimes uncomfortable for the client to see this because maybe they do understand it, they do know exactly what it is that they're doing, but they don't know that it's wrong. Or is it uncomfortable for them because they're thinking, "This is not something we can sustain. If I make this change I'm not sure that we're going to be able to make it. I'm not sure that we're going to be able to sustain the change.”
Gabrielle: Sure. I think there's a lot of fear that's around the financial statements and numbers in particular. I find that a lot that because they don't understand it there's a fear around it. And quite honestly it's just changing how you see your financial world. It's really not anything different from what they're normally doing. They just happen to be co-mingling the funds in their business. It's all showing up in their business where it shouldn't be. A lot of times they feel like they've gotten their hand slapped as well. "Oh yeah, I know I shouldn't have done that", all those other things. Now, you bring in a CPA, you bring in somebody to help you be more accountable. You say you want to be successful so bring in somebody that will help you stay accountable and do the right things. And that's what we really do with our business owners is, "This is what you said you wanted so let's make sure that we're going to help you meet those goals.”
I think there's a lot of fear that's around the financial statements and numbers in particular. I find that a lot that because they don't understand it there's a fear around it.
Jeff: Better to have Gabby slap your hands than the IRS slap your face, or punch in your gut, or whatever it needs to be.
Jeff: Very good points, and I think very important indeed. How does this new understanding, this awakening, that business owners might have one day when they talk to you, or they talk to their CPA, or someone who's kind of involved in a more forensic kind of way, how does this impact one's exit strategy? Because I think a lot of, certainly our listeners to Deal Talk, they've got plans on leaving their business at some point and maybe they've gotten an early start on making those arrangements. Really, if they had to do it in a pinch this is probably not a good time for them to leave. Does this cost people oftentimes to have to change those exit plans that they have so that they can get things right?
Gabrielle: Sure. I think that you have to start looking out, depending on your goals, when you're trying to actually exit your company you have to first make sure your financials are in place. That is usually when people start to realize, "At some point I'm going to have to sell my company and I don't want to be doing this forever. I think maybe in five years, or two years, or whatever." That's when they start seeking out professional help a lot of times. And so certainly plans might have go change due to just the way that they've been handling their business for the past, it could be 20 years. You have to really go back, make some changes, and put together a plan B.
I think that you have to start looking out, depending on your goals, when you're trying to actually exit your company you have to first make sure your financials are in place.
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Jeff: Welcome back to Deal Talk, I'm Jeff Allen with my guest Gabrielle Luoma, owner of the GMLCPA LLC in Tucson, Arizona. She herself is a CPA and a chartered global management accountant, and we thank her so much for joining us today. It's been fun so far. Now we're going to switch gears just a little bit, Gabrielle. There are so many things that we could talk to you about and may have to actually have a second show to fit all of these things in and we'll do that in another time. But I'd like to start the second half.
We're going to talk a little bit about selling a business. I was just kind of wondering, how does one really know, to start the second half, the right time to sell his or her company? Is there a right time, is there a perfect time? We've always been told, for example when we get married that there's never a perfect time to start your family or to have that first child. But with regard to your business a lot of people sometimes confuse their business with their children, and for some people that's exactly what it is, it's their child. How do you know when it's the right time to let go?
Gabrielle: I think it's different for everybody. I don't know that I can make a blanket statement, but I think you have to really look at your goals and what you want to accomplish in your life. A lot of times what happens is the business becomes your life as you mentioned. It becomes your child. It's your baby and you cultivated it up from a little seedling. And so there's a lot of emotional attachment to it and sometimes the best course of action is talking to a professional, because they can actually help you break away from the emotional side of it to this needs to be a business transaction. From there the best thing would be to look at what you're trying to accomplish. If you're 60 years old and you would like to be fully retired by 65 then what do you need to do in order to make sure that that happens? If you're an entrepreneur, let's say you just started a company of great ideas, and you think that you would like to get it ready to be actually sold in a year or two. Then you would put together ideas and ways that you would go about doing that. The best time would obviously be when the company's performing its best. That's a really hard time to let it go actually, but that's probably when it's the most attractive. And rarely do people actually give up their companies when that happens, unless you're an entrepreneur and you just spin off ideas like crazy. I would say that decision is a case-by-case basis but usually it's when you're on top.
Jeff: How many of the people that you work with, Gabrielle, can you say the timing was really, really good where they had their exit strategy in place and they said yes. Maybe they've re-worked it a bit. "Okay, I'm going to retire in five years and sell my company." And then five years come up and things were right on top, everything was great, business was booming, and they were able to take and make, bank, the transaction of their business, and everything worked out really well.
Gabrielle: I've been involved in several. One was actually a solar company, and it was right before solar really started to take off and all these credits were being given out by the federal government. And so that was a great opportunity for them to sell, and move on, and fully retire. And I think that what they were doing that along on the way was actually cultivating relationships, getting ready for that situation so that when it was time, it was time. And so they were actually able to go out fairly on top. I've also seen other companies who have developed and developed and developed, and they had a small company that, let's say it's an $80,000 a year company. It wasn't a big company but it was their lifestyle company that they actually raised their family on. They got to the point where they were ready to retire and another company was able to come in and just buy them out straight up with a cash deal. And so for them that was successful, that's what they were looking for. It doesn't happen all the time but I would say 50/50. If you're planning and you have relationships, and you've been doing some networking and kind of trying to keep your ears and eyes open then I think you have more chance of a very successful deal at the time you're ready.
And so there's a lot of emotional attachment to it and sometimes the best course of action is talking to a professional,
Jeff: Let's say I'm thinking about selling my business or exiting my business at some point but I'd like to know what the options are that are available to me when the time comes. Can you talk to us a little bit about some of those options that are available out there?
Gabrielle: The first option and the one that most people just think about is somebody just coming in and buying them right out. They come up with an agreement and then they just settle. Usually that requires you to have some sort of ongoing relationship so that you can keep that company going. Rarely do I see you completely get out of that company right away. But that does happen. So there's cash deals. And then there's opportunities for a key employee or you want to bring on a partner. It could be one of those two different combinations. So a key employee who really would love to take over the company, they've grown up through the company and they're ready to buy you out. That's a great opportunity so you should always be looking around to see if somebody in your company is interested and capable of taking over when you go to your next situation, whatever that is. And then of course taking on a partner, somebody who is already in the business, who already understands what's going on in the industry could come in, become a partner, while you phase out and then they eventually buy you out in stages. Those are a few of the different ways I've seen companies be bought out.
Jeff: You touched on the $80,000 a year company as an example, and that's actually kind of a way to maybe frame this next question. If I've got a business and maybe it's not necessarily making money hand over fist, but let's say it's maybe on the smaller side of that. How am I going to know how easy it is for the prospective buyer to actually buy my company? Is there a way that I'm going to know for sure whether or not my company qualifies for bank finance, for example?
Gabrielle: I think that getting a banker involved really early on for the buyer will be really, really important. In that situation you might have a company who's much, much larger just be able to go in and do a full stock sale. So that may be an option too. But if somebody's coming in and wanting to finance, there's a couple of different ways of doing that. You could do a partial finance, you could go to the bank and say, "I want this much of a loan." Usually what they're going to say is, "I want you to put up 20 percent, 30 percent, 40 percent, 50 percent to go towards that purchase." You may have a seller financed where you're going to have to carry the loan for that large company and I've seen a deal like that. It was a few years ago but I did see someone who carried the loan for quite some time. And it was a large loan and it worked out great for them. You just really need to make sure that you have a good banker involved and then they're looking at all the different avenues to help finance any of the buyers that are coming along.
So a key employee who really would love to take over the company, they've grown up through the company and they're ready to buy you out.
Jeff: And looking out for your best interest too. After all, if it is your banker in fact they're going to be doing that. Typically what happens, do you get paid in one lump sum or do you take payments over time after the deal has been consummated?
Gabrielle: Yeah. So if you're doing a seller financed situation then you would get a lump sum. And sometimes it's on the back end too so you'll do a small lump sum in the front just like a down payment then payments for however long the duration of the loan would be, and then a big lump sum at the end. So that that new business owner can create some credit and get some traction underneath them, and then they can go to a bank in three-five years and ask for a loan to pay off that lump sum. That's kind of the reasoning behind doing something like that.
Jeff: Gabrielle, it looks like we're almost nearly coming to a full stop here on this show. You look up and there's the clock, and time flies when you have a good time. And that's exactly what we've done. I hope that you've enjoyed yourself. Real quickly though, what I wanted to find out. I know that there are a number of people listening and they probably like to get in touch with you. They've got some questions and maybe even for the purpose of potentially working with you at some point, how can they reach you?
Gabrielle: My website at gmlcpa.com is a great place to start. You can contact me through email@example.com, or call our number at 520-572-1248 and just ask for Gabby and we'll get you all set up.
And sometimes it's on the back end too so you'll do a small lump sum in the front just like a down payment then payments for however long the duration of the loan would be, and then a big lump sum at the end.
Jeff: Fantastic. Gabrielle, it has been a real pleasure. It's been a very informative session today and I hope that we can have you back on again on Deal Talk real soon.
Gabrielle: Yeah, that would be my pleasure. I would love that.
Jeff: Gabrielle Luoma, CPA and chartered global management accountant has been my guest today and we thank her so much for joining us.
If you're a professional who normally consults with small business owners, a serial entrepreneur perhaps who owns multiple successful businesses, or a small business owner who has sold a business and you'd like to share your experience with our listeners we'd like to hear from you about joining us as a possible future guest on Deal Talk. Simply give us a call at 888-693-7834.
Deal Talk is presented by Morgan & Westfield, a nationwide leader in business sales and appraisals. If you're thinking about selling a business or buying one call Morgan & Westfield at 888-693-7834 or visit morganandestfield.com. I sure have enjoyed having you as our listeners today and hope that you'll tune in again soon. My name is Jeff Allen, thanks again for listening to Deal Talk, we'll talk to you again.