Jeff: Welcome to Deal Talk brought to you by Morgan & Westfield, I'm Jeff Allen. If you're a business owner, entrepreneur, or investor this is the place to be. Our mission is to educate and inform you along with the help of some of the most credible, highly-regarded experts in the industry of transacting businesses or providing services to businesses so that you'll be better equipped with the knowledge to help you make some important decisions when the time comes to sell your business or to buy one.
Today, we're really interested in talking to business owners who may not necessarily be looking to sell their businesses right away. Maybe you've got a game plan, five, ten, twenty years, whatever the case may be, but it's something you've given some thought to. My question though to you is this, in the day-to-day operations of your business, how much money do you think your business is costing you? Have you given that some thought? Everybody does. When was the last time that you met with your accountant and did a really deep drill down of your operating budget and expenses? My guest on this edition of Deal Talk is going to talk with us about something that we're all interested in and that's saving money, by cutting costs. His name is Vinil Ramchandran. He is the president of AcuSolutions, a niche consulting firm that helps companies nationwide save money and improve profitability through various specialized tax incentives and expense audits. He's based in Los Angeles. Vinil, I want to welcome you to Deal Talk, good to have you.
Vinil: Thank you Jeff, it's my pleasure. I appreciate you inviting me.
Jeff: Let's start by talking a little bit about you and talking more about AcuSolutions, if you would. Give people just kind of a taste but maybe you can kind of fill us in on where you've been, where you come from, and what AcuSolutions really does try to do.
Vinil: Absolutely. Your introduction there Jeff was perfect. Basically what we do is help companies save money so we've got a bag of tips and techniques that we use in specialized areas. We know a lot of times they're leaving money on the table. So my background, I'm an industrial engineer by training, I worked for an S&P 500 company for years, and served in various management capacities. One thing I realized is businesses are struggling to improve their profitability. In order to improve your profitability there are two areas that people need to focus on which is either improving the top line through your sales and marketing initiatives or get through with the bottom line by reducing expenses. And obviously every business needs to do both. But one thing I've noticed is many companies missed out on very simple strategies that are available to them in terms of cost reduction and cost savings. So really what our company does is focus on helping businesses capture some of these hidden dollars, as I'd like to put it and really dig it up with a shovel and bring it up to the table.
Jeff: To kind of whet the appetites of our listeners and give them reason to really stick around for this conversation Vinil, once a company does what is necessary, to bring its expenses under control. What kind of impact can that have on the valuation of that company?
Vinil: Yeah, obviously saving money and reducing expenses is not just for someone looking to sell their business as you mentioned; every company is interested in improving their profitability by lowering their expenses. Having said that, it becomes especially interesting for people that are looking to sell their business, whether it's now or some point in the future. Everybody wants to think about a potential exit strategy. Or for people that recently purchased the business and they're looking to turn around and improve the value of the business beyond what they paid for it. In terms of valuation, as you know businesses are typically valued as a multiple of earnings, and anything we can do to improve the bottom line and improve the strength of the financials, it's going to have a positive impact on the value of the business.
Just as an example, a recent client comes to mind, where we helped them save money on their freight expenses, and we've been working with them for a couple of months, save them about $3,000 to $4,000 a month, and expected to continue on a month to month basis for the next several years. So if you extrapolate that out, the client's going say the $3,000 to $4,000 a month doesn't sound a lot of money for a company their size. They're a small manufacturing company. But when you look at that on annual basis we're talking $36,000 to over $40,000 a year. If they were to sell their business in a couple of years and just take a reasonable earnings multiple of three to one, the $36,000 times three is now a six figure add-on to the value of their business. Not to mention the improved cash flow in the interim before they sell their business, or if they decided to just keep the business long-term.
A lot of times we find that clients may have looked into this in the past, the regulations change. So a client that would not have qualified for something like this 10 or 15 years ago now may be a great candidate for it, either because of changes in regulation or because of the client’s individual circumstances based on the amount of ….. that would potentially qualify for the benefit, or in terms of the changes in their day to day activities of the business itself.
Jeff: It really is good to hear you say that Vinil because really when you think about it, that figure that you gave is $3,000 to $4,000. That could mean actually too, someone's salary. Maybe that would be a more kind of on the lower end of things. But other companies could possibly save them even more money by drilling down into those expenses and cutting costs. And I know that you've probably seen, depending on the businesses that you work with, a wide variation of cost savings over the course of a year, or as you just talked about, several years. We often hear of these stories where a company feels that it's done everything that it can do. And then what does it have to do once it feels like it's taken all the necessary steps to cut costs and maybe these are tough economic times we're talking about' or even the best of times. They have to what? They have to start then considering elimination of human capital and starting cutting back hours. So you're really talking about something there that's significant and adds the value of a company and potentially could be the difference in a salary in bringing somebody else on who could take on more work and create a more productive environment, and even impact the business.
My question though Vinil, most companies have a CPA or an accountant they can rely on and they hold monthly meetings or quarterly meetings to kind of find out that they're on the right track. Why do businesses need a consulting firm these days to help them with specialized tax types of incentives that are available out there to help them kind of recover some of those costs if they already have a CPA?
Vinil: That's a great question, and by the way, that's one of the most common questions we get from clients that we work with. As soon as they hear that we're looking at some specialized tax incentives and the opportunities to save them money, the first thought that comes to mind is, "Wait a minute, we've already got a CPA. If there is a tax incentive that applies to us, he must be capturing it for us". Well, sometimes that is true, but what we find is there's just a ton of opportunity that often gets missed. First of all there's a huge lack of awareness. There's a lot of specialized tax incentives that are outside the typical day to day function of what a CPA does. CPA's are great. We work with a lot of CPA firms across the country helping them capture these benefits for their clients. And as you'd point out that we're not CPA's and we do not do taxes for clients. We focus on a handful of specialized tax incentives that requires a very specific technical expertise, sometimes from an engineering standpoint, sometimes from a legal standpoint that is outside the expertise of the CPA firm. And most CPA firms understand that, and that's why they typically outsource it to folks like us. I'll give you some examples of what these tax incentives are and just a snippet of also what we do.
A common one is research and development tax credits. Companies that are engaged in manufacturing, engineering firms, software development and several other industries; a lot of work that they do on a day to day basis, think of it as a research and development because that's not the language they use to describe it. And many companies often think of research and development as something down by the big hi-tech companies or the GE's of the world or the 3M's of the world. And of course they do a lot of research and development. But when it comes to the tax codes, a lot of work that manufacturing companies, as an example, do on a day to day basis with new product development and new process development. A lot of the engineering work that goes into developing new products for their clients will be considered “qualifying research expenditures”, that in turn can yield them a very nice tax incentive. To answer your question, why wouldn't this already be handled by their CPA? A lot of times we find that clients may have looked into this in the past, the regulations change. So a client that would not have qualified for something like this 10 or 15 years ago now may be a great candidate for it, either because of changes in regulation or because of the client’s individual circumstances based on the amount of ….. that would potentially qualify for the benefit, or in terms of the changes in their day to day activities of the business itself. So lack of awareness is a big one. A lot of clients just don't look into it. They don't bother speaking to their CPA about it. Their CPA may not be aware of some of the functions that take place in their business, and if they were, often times their CPA wants to understand if a client has a need for it they would reach out to someone like us to handle this for the client. But it gets missed so often, especially with small to mid-sized manufacturing companies quite commonly.
Another example I can give you is what we call a cost segregation studies. This applies to any business owner or investor that owns commercial property and income generating property can potentially take advantage of this strategy. And what it is, is a method to help accelerate the depreciation on the property, which yields a substantial cash flow advantage to the property or typically to the tune of $50,000 to $70,000 for every million dollars in building cost. So, as you can see, the dollars can add up really fast. It's a pretty substantial tax benefit for the client. But it often gets missed. And that's another example of a study that requires the use of engineers because it involves doing a study on the various sub-components of a building, analyzing them, determining the value of them, putting together an engineering report, and really helping the CPA be able to allocate the depreciation schedule correctly.
Those are just some examples of specialized tax incentives that we would handle that a CPA would generally not do on their own. I like to think of CPA's as generalists. It's kind of like your family physician. You wouldn't go to your family physician and say, "Hey, if I needed brain surgery I already have a family doctor, he would be taking care of it for me." It doesn't work that way, there are other experts that would focus on those specific categories that your family physician wouldn't do. And people don't think of CPA's that way, but taxes are a very broad field and there are several areas that end up falling outside the expertise of your average CPA.
Jeff: I think you're making some very, very good points, and particularly of interest is the idea that we all know is that the tax laws are constantly changing. And it's hard to really take and put too much weight on top of your CPA who is already probably overworked in some cases and is probably already doing as much research and as much reading up on the tax codes as they possibly can to see which credits apply to you and your particular type of business. But I think the point here that you're making is the devil, or in this case, the angel is in the details. And that angel could mean significant costs savings provided you have a really strong understanding of all the incentives that are available to you in your particular industry, whatever industry it may be that you're working in. And some of the industries you talked about, you mentioned manufacturing, for example, that could benefit from some R and D tax incentives. What are some of the other industries that you commonly work with that you uncover, Vinil, tax incentives for?
Vinil: Another common tax incentive that applies to a lot of our clients are it's an export tax incentive for anybody that exports US-made products or US-made services. For example, manufacturers that export products, or distributors that export products made in the US even though they didn't produce it themselves. In some cases, engineering or architecture firms that design... Say for example somebody that designs a stadium that's going to be built in a foreign country, but the design was done in the US. For the sake of the tax incentives it's treated as an export. And the tax incentive I'm referring to is called IC-DISC. It stands for Interest Charge Domestic International Sales Corporation. And without getting to all the technical detail I'll give you a real brief explanation on what that is.
The way the process works and what that incentive does is the government allows exporters to take a certain portion of their export revenue or their export profits and move it into a tax exempt entity that we create for them. And it's a tax exempt entity. So when they do that, they get to take a deduction on the corporation that owns their manufacturing business, as an example. So they get to deduct the amount of revenue at their ordinary income rates. So for example if our company's had a 35% tax bracket and it had a $100,000 that was being moved into this entity, they would save $35,000 if they are in a 35% tax bracket. And when they take the money out of this tax exempt entity in the future, it's treated as a dividend distribution so they are taxed at a lower dividend tax rate of 15%. So you end saving that 20% difference between the 35% of your ordinary income and 15% of the dividend tax rate, which can be pretty substantial tax savings. That net result is companies that export can potentially save, when they really go through all the math, the numbers work out to just below 10% of their export net profit. It's a typically savings opportunity. That's another area that we find gets missed so often. It's such a niche category.
In fairness to clients and to CPA's, it's just not reasonable for clients to be expected to keep track with all the changes in the tax code, the different incentives that are applicable to their business. And in many cases it's not reasonable to even expect a CPA to be an expert on all of these categories because... An average CPA that may have 100 clients, how many of them are realistically going to be exporting a meaningful volume to be able to qualify for these things. For an IC-DISC client we would typically look for a client that's exporting over $2 million a year. And not a lot of companies do that. So if a CPA has one or two clients that do that, chances are they may not be able to spend the time to research that particular tax incentive they will not even hear about it. That's another very common one that gets missed by a lot of exporters. So that's an example of someone we work with.
The way the process works and what that incentive does is the government allows exporters to take a certain portion of their export revenue or their export profits and move it into a tax exempt entity that we create for them.
Jeff: That's why we have you on the show Vinil Ramchandran. We're discussing how you can keep more of your money. And we're going to do more of that when we continue our conversation with business adviser Vinil Ramchandran. I'm Jeff Allen, and I'll be back when Deal talk returns after this.
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Jeff: Welcome back to Deal Talk, I'm Jeff Allen with Vinil Ramchandran, president of AcuSolutions. He's a business adviser and he's helping us think about some ways that we can cut costs. This show, really when you think about it, we could go on for hours talking about these types of things. You're in a very interesting position with your business because you have had a tremendous amount of success in helping companies all over the country, regardless of their industry, uncover some cost savings with regards to what we've already talked about, tax incentives. But there are a number of other expenses that businesses incur each and every day, every month, every quarter that maybe they're not considering. Maybe they simply haven't turned over every stone. Let's talk about these types of things. All businesses are different. But in your experience what are some of the most common examples of inflated expenses among the companies that you've worked with?
Vinil: On the expense side, leaving aside the tax incentive that we discussed, the areas where we found the biggest opportunities are typically workers compensation premiums. It's a big expense category for clients in a variety of industries. Typically we work with folks that spend at least $50,000 a year, or more, and generally we find that in the construction sector, in the manufacturing sector, and really it could be any other industry with a lot of physical labor. For example restaurant chains, delivery businesses, security businesses, maybe some car dealerships. Other areas such as freight expenses, that's another high expense area for a lot of companies that produce products or do e-commerce sales for example, distribution companies. They spend a lot of money with UPS or FedEx, and they spend a lot of money with carriers on their truckload or less than truckload shipments.
Those two tend to be the biggest areas, but we also helps clients with other areas like their telecommunication expenses, their cell phone expenses, we help them lower their credit card processing fees. And another interesting one that we've been working on or where we've seen a lot of opportunity for clients is enrolling them into certain class action lawsuits where they are eligible to get a refund as a result of a class action lawsuit. A lot of times clients usually hear about this in the news, they get documentation in the mail, people are busy, it just seems like a lot of paperwork, and time and effort for a client to deal with. It ends up getting tossed in the mail or in the trash. And we have a process to help evaluate with the clients to see which class actions they qualify for, if it's going to benefit them, enroll them in the process at no cost to them, and wait until they get their refund check once the class action has settled. Those are some of the most common categories where we think clients have an opportunity to save money.
Typically we work with folks that spend at least $50,000 a year, or more, and generally we find that in the construction sector, in the manufacturing sector, and really it could be any other industry with a lot of physical labor.
Jeff: We talk about the manufacturing companies and a lot of them out there, manufacturing by the way, is regaining its strength really in this country in terms of plants coming online and there are more and more stuff being made here now it seems Vinil. The supply chains, they just get so convoluted and so big, and there are so many moving parts, and there are so many people involved and companies involved in the manufacturing and distribution of these products. How can firms that have large shipping expenses lower their shipping costs? Can you kind of give us just a taste of maybe some of the details? If you are having a conversation with a company right now, what would you tell them about that?
Vinil: Absolutely. I'll answer the question two ways. First I'll give you an overall genetic formula that applies not just to their freight expenses, but it's sort of a formula that we use at the cost savings consulting industry for a variety of categories, whether it's telecommunication expenses, or cell phone expenses, or waste, the general formula goes by us having industry insiders that have very specialized knowledge about that particular industry. So whether it's folks with 20 plus years of experience in the freight industry or in the workers comp industry, or what have you. By having that industry insider knowledge, it gives our auditors an advantage over what a client would be able to do for themselves. Keep in mind we work with high dollar categories and most of our expense, actually all our expense audits are done strictly on a contingency basis where clients pay us a percentage of their savings. So it's strictly a success-based formula where we don't charge them anything for the actual audit service unless we're successful in delivering savings. Because of that we’ve got to set certain minimums, we work with clients that were on the high-end of the expense side. And clients aren’t taking these expenses line down. If somebody's spending $100,000 a year on shipping expenses or workers compensation, you can rest assure that they're doing everything they can to lower those expenses, from shopping around every few years and trying to get competitive bids, to researching and looking for errors themselves. But despite all of that we still have really good success finding client savings and it varies. Something like freight, almost 100% of the time we'll find clients some savings.
But the formula that I was going through was step one, having industry insiders that have specialized knowledge. What we do is we look for errors and overcharges that can vary by category obviously. But every betting category has some opportunities for us to go look for those errors and overcharges, which we can then correct. Stronger negotiating position in some cases. For example, if you're negotiating with shipping carriers on behalf of a client, find maybe a great negotiator that sells and they might do a great job handling that on their own, which a lot of our clients do. But by having industry insiders that have the unique knowledge of that industry, and because we get to negotiate on behalf of large numbers of clients, we have almost like a group purchasing, sort of buying power, right? When you go and negotiate with a company with the freight carrier on behalf of 50 clients, they're going to take you more seriously and they're going to have to sharpen their pencil and give you better pricing than they would be able to offer any one individual client negotiating directly with them. That's a huge opportunity right there.
And the last part of it is ongoing monitoring because people can work out a great deal. They can clean up the mess so to speak. But things change. There's always opportunity for bidding procedures to change and for invoices start growing, and expenses could get out of control if somebody doesn't keep an eye on it. And clients are really busy. If they're busy manufacturing products, that's what they should be doing. And all those ancillary expenses can be managed and outsourced in a much more efficient manner to yield bigger savings. Now, to answer your question about freight, beyond the four steps that I mentioned, I'll give you a very specific example of a unique solution that we bring to the table.
For companies that spend large amounts of money with UPS and FedEx, we typically work with folks that spend over $200,000 a year on UPS or FedEx. What we do is we offer an automated software service where we will audit every shipment that leaves their warehouse on a daily basis. What people don't realize is if the shipment doesn't arrive on time, which happens every so often. You set out a shipment that's supposed to arrive in three days, and it arrives at four or five. That's a late delivery and their owed either a full credit or a partial credit. But it's just not efficient for the client's staff to get on the phone and contact either UPS or FedEx and stay on hold, and request that credit for a few dollars at a time. It's just so inefficient. They would spend more time and labor in trying to implement that process than the credits that they would receive. But by utilizing a software that can automatically scan through their invoices, identify these late deliveries, and identify various other search strategies that are applied, typically under invoices. And if I'm reading whether they're really valid, surcharges are not, we can quickly identify these overcharges and work with the carrier to get a credit for the client. That's an example of a savings opportunity where the client, the example I mentioned earlier where we were saving that client over $2,000 a month, came as a direct result of the service where we were automatically tracking their invoices. This is an ongoing thing. We typically find an average of about 3% savings. So if a client is spending a million dollars a year on shipping, that's about $30,000 a year that we're going to find in savings opportunity. The best part is the client does absolutely nothing. It literally takes minutes for us to get the process set-up and everything is handled behind the scenes. And the client basically gets results on a weekly basis, telling them, "Here's what your invoice was and here's the savings we found. Here's the net result to your bottom line."
Jeff: One of the few occasions where I've had a guest actually answer three or four questions all in one shot. And it's really, really nice and comprehensive the way that you were able to handle that because you talked about a number of different things there. Of course these are a non tax related issues, items that companies can look for. And we also talked a little bit about workers' compensation in there. You addressed some of the special needs that manufacturers have with regard to shipping expenses and how you can address those. If there is nothing else that anyone who's been listening to our conversation takes away, Vinil, from this program today, other than maybe a couple, two or three key take aways, what would those take aways be? What would you like people to remember about this conversation and about the importance of recovering costs in order to obviously keep more of their money?
Vinil: I think the biggest takeaway is that no matter how efficient the company thinks they are in terms of the expenses, there is always additional opportunity for savings. The job is never done. You always have to keep an eye on your expenses and dig through the details and find these savings and opportunities. I think a business owner needs to constantly be on their toes in terms of managing expenses, just as they would manage their top line and their sales. They can't do it all on their own. I think if they have a great team, they can allocate some of these tasks internally. But utilizing resources and expertise that can come to the table and help them on a no-cost basis, is typically a win-win. And it's a great way to outsource some of the work, reduce the burden on their staff, and actually get better results. Because it's one of the few areas where you can get outside experts to come and help you in a part of your business and not have to pay them unless they actually delivery results. There's not a lot of other industries that I know of where you don't pay by the hour or a flat fee for the service regardless of the outcome.
Jeff: Vinil if they would like to reach out to you, if they have any questions and they'd like to get in touch with you how do they do that?
Vinil: Our website is www.acusolutions.net. Our telephone number is 323-989-2281, or I can be emailed at firstname.lastname@example.org.
Jeff: Well, Vinil Ramchandran we've ran out of time. This was a great topic of conversation to have, and all you need to do is assemble the proper team and you can get in touch with companies like Vinil's company to ask more about it, and get some outside help on a no-cost solution right there. Vinil, again, thank you so much for being with us on Deal Talk today, we enjoyed it.
Vinil: My pleasure, thank you for having me.
Jeff: Vinil Ramchandran, president of AcuSolutions has been my guest. Deal Talk is presented by Morgan & Westfield, a nationwide leader in business sales and appraisals.
If you'd like more information about buying or selling a business call Morgan & Westfield at 888.693.7834 or visit morganandwestfield.com. And make it a point to check in with us again soon for valuable information and insight from our growing list of small business experts on Deal Talk. My name is Jeff Allen and I'll see you again soon.