Jay Sachetti joined Jeff O’Brien, partner at Husch Blackwell and Dyanne Ross-Hanson, president of Exit Planning Strategies talked about the market for mergers and acquisitions, exit planning opportunities for companies that don’t end up for sale and how companies can maximize their eventual sale price during an early October panel at the first Upsize on Tap event at Summit Brewing Co. in St. Paul.
When the state Legislature passed a law requiring employers to provide paid leave and safe time for employees, Justin Bieganek started hearing differing details from friends, colleagues and peers.
Rick Brimacomb, Club E and Brimacomb + Associates, moderator: I’ve spent my career in venture capital, and venture capital is about creating something out of nothing. There are often many of the same issues that affect all growing companies. We’re here with a panel of experts to help you learn from them and help you avoid some of the same mistakes others have made before you. Let’s have each panelist introduce themselves.
Melissa Johnston, Highland Bank: I work with clients from start-up to exit and enjoy every stage of the client relationship. On the personal side I received my MBA from the Carlson School in entrepreneurship, and I’m married to an engineer, and I have three children in Chinese immersion.
Patrick Maloney, DS+B CPAs + Advisors: I started my career as a franchisee in a business services company, and I built it and sold it, and then DS+B asked me to come on board as director of operations. I’m a generalist; anything that comes up I have some manner of experience with.
Dan Moshe, Tech Guru: I founded Tech Guru in 2004. It’s the IT department for about 80 businesses. We implemented this system called Traction in EOS, Entrepreneurial Operating System, a simple set of traction tools, and implemented that so well that I worked myself out of a job. On a personal note, I have two young sons, 3 and 6, and I just taught my six-year-old how to ride a bike.
Tom Siders, L. Harris Partners: I was with the big CPA firm, McGladrey, for years, and spent much of my time in hotel rooms and airports. I failed at retirement, and then about five years ago we formed L. Harris Partners, where we work with businesses to help them build value.
Rick Brimacomb: Talk about the lens through which you view this issue.
Melissa Johnston: The lens I look through as a business banker, is the cash management needs of my clients as well as the loan repayment ability. There are many successes that come along the way, but also challenges. I like to challenge their old way of thinking, specifically in fraud prevention.
Patrick Maloney: My lens starts with why: Why are you in business, what’s the business for? The financial lens is critical. Also there’s talent and leadership development. My approach is to look at a business from a number of different perspectives, and sort out what needs to happen to take it to the next level.
Dan Moshe: I’ve been a chief information officer with dozens and dozens of businesses, and I’m also an entrepreneur myself, so I bring both of those perspectives.
Tom Siders: Our firm’s whole focus is an evaluation of a closely held business, all aspects, and then helping the owner create a roadmap about how to increase the value. Most owners come to the realization that they’re not going to be able to sell today for the number they will need to achieve the lifestyle they want. We help them plan the exit.
Rick Brimacomb: Please give us a handful of minutes on avoiding the avoidable.
Melissa Johnston: In 15 years of business banking I’ve seen a lot of things, including the 2008 to 2011 recessionary time. I thought I’d focus on internal fraud. As companies continue to grow, and founders get their hands off the books, you have to separate the duties among different folks among your company.
You can spot-check, to make sure vendors are getting paid and no fictitious accounts are set up. Other simple things, like a separate account for payroll, can help. The bank that you’re with could identify fraud identification services. The cost of preventing fraud is less expensive than fixing the fraud.
Rick Brimacomb: Did you see an increase in fraud when the economy went down, or does technology contribute to fraud?
Melissa Johnston: There’s been an increase in fraud with technology, and when people take their eye off checks, then we see check fraud, for example. The fraudsters are really creative, unfortunately.
Patrick Maloney: When I look at mistakes that derail successful companies, the first one that comes to mind is success itself. Specifically, companies achieve a goal and they fail to create a new goal. The other reason success can be a de-railer is not understanding what made you successful.
The owner’s charm may not be the reason; it might be your competitive price, for example. The other part is being a good Boy Scout: being prepared for the worst. What if you lost that client or that key employee, or you had fraud? Thinking through those things, not to be scared, but what could you do prevention-wise.
The first thing for growing a successful business: cash. The first thing I’ll look at is cash flow. If you’re trying to cut costs and you don’t have enough cash to fulfill on your business, you won’t be operating.
The second thing is gross margin: You cannot make it up on volume. Talent development, especially if you’re looking at transitioning your business, that can be very important. Talent development is an investment, it’s a matter of years and decades, not weeks or months.
And vendors are important: it’s an untapped resource, you can learn so much from your vendors. Do you ask advice from your vendors? The final thing is the discipline of running a business: integrity, do what you say you’re going to do.
Dan Moshe: I created a top five list of things that companies do that can put them at risk.
The cost of a secondary internet connection is relatively small, $100 to $150 a month, and that cost could easily be made up in just a couple of hours of what would otherwise be down time. Then I would investigate what other inexpensive forms of redundancy could you buy to prevent your people from having to go home.
Just like with an accountant you might hire, you want to hire one that will help you get where you’re headed. If you haven’t looked specifically into an app that will help your industry, look again. I recently saved a client hundreds of thousands of dollars by identifying an app that had just been developed, and they had been about to go to custom software.
It’s really simple, and it’s slightly annoying. Your bank probably already does it. If you log in from an unusual place, it will send a text message to your phone. Think about cybersecurity as not if but when. It’s just a matter of time until your information, your clients’ credit cards are stolen, and you have to have contingency plans in place.
Make a plan and a budget for replacing computers and equipment. Create a high-level document, write down how does technology support your business in two to three pages. That will also help you identify points that could be points of failure as well.
Make sure that technology seat is in the most optimal place in your organization. Technical people should be able to speak English and understand the language of business. Your action item there is to update the job description and role of technology in your company, and if you don’t have that, identify those and make those changes.
Tom Siders: So you’re telling me giving my Social Security number to that Nigerian prince that I wired the money to, was a bad idea? [laughter] What derails a business? Business hygiene. If you have a business partner, do you have a buy-sell agreement, and have you looked at it in 15 years?
As soon as someone wants out, someone will not like the price. I know you have to pay your attorney to update it, but you’ll pay your attorney a whole lot more if you get into a dispute with your partner.
The business owner needs to consider what happens if there’s a loss of key talent, that is the owner: how will that affect banking relationships, leases. What if you lose your biggest customer? How about your supplier goes out of business, the one that provides you with 80 or 90 percent of product you sell.
I’m not hung up on death, but I’ve had two non-client situations in the last year, when the business owners happened to be friends but not clients, and died without considering what happens with the business. We think business owners should spend time on these hygiene issues.
Secondly, business owners fail to work on the business. They like working in it. We focus with our clients on the seven drivers of business value: a competent management team; a diversified customer base; systems and processes that will sustain the cash flow; a growth strategy that is actually working; financial controls—and trust is not a control; a good and improving cash flow; and scalability.
Scalability applies to all businesses. Revenue growth is the crack cocaine for the entrepreneur. They focus completely on revenue growth. But if your business can’t be scaled, that is, you don’t have the processes or the people, the business will blow up. You can actually grow yourself right out of business, because your revenue is there but the cash flow isn’t and you haven’t scaled your operation.
An example, we’re working with a client that is growing 50 percent each year for the last five years, and the owners have taken out 97 percent of the cash profits each year. One of the business owners said, we’re growing so fast we’ve got some things we should do.
The other business owner said, no, we need to pay those dividends. We did an assessment, and it was unbelievable what we found. Customer issues that haven’t been addressed; outdated customer information; a conversion rate that’s less than 2 percent. So my third one is the fail to scale.
Rick Brimacomb: How about an example of a business that failed and how it could have been averted?
Tom Siders: We had a banker pull us into another situation, the business had grown from $5 million to $20 million in three years, but their net income was flat lined for the whole three years at $500,000. They got so intoxicated with the revenue growth, that they didn’t pay attention to the cash flow and the margins. We found out more than half of the revenue growth was with customers they were actually losing money on.
Rick Brimacomb: For the average person, how can they determine if an investment in technology is worth it?
Dan Moshe: Just like any other business investment, there should be a way to calculate the return. I’ll take an example: Let’s say you want to invest in an internal chat software. It’s a great way to keep your team on the same page. It’s shiny and cool, but wait a second, is this best for my business.
So we calculate that by how much time will be saved in 10 fewer emails per day per person, for example. If you could send a quick message and calculate the time of the opportunity cost, that’s one way you can calculate the return on investment. When it comes to, for example that internet outage, let’s say the internet connection goes down one day a year. Is that cost greater or less than $5,000, the cost of the backup internet connection?
Rick Brimacomb: Patrick, how does your background as a business owner inform your views?
Patrick Maloney: The idea of working on your business is a very important one, and to realize the long-term value is from what you put into it. Developing people is a part of that, that can free you up to work on your business. Having your vendors help you, that can free you up to work on your business. As well as planning with your CPA, and before you hand out the bonuses, think about what the government is going to need from you.
Rick Brimacomb: Melissa, how can business owners build their relationships with their banker, and talk about cash reserves.
Melissa Johnston: It’s been pretty well established that cash reserves are extremely important during a time of recession. But I also want to touch on the positives of having cash reserves in terms of opportunities. Having a projected cash flow statement can help you make sure the cash will be there at the end of the month. If you want to continue on the path of success, think about the ability to invest in growth opportunities as they arise.
As to the banking relationship, I’ve come to realize over time how folks really value the relationship with your bank. Your banker should be a resource for you, connecting you with sales opportunities, be there as a sounding board for you. You should be able to be transparent with your banker. I’ve heard stories from others that they’ve been concerned about sharing, but your bank is going to find out anyway. So if you can’t be open and honest, it’s time to get another banker.
An example is an environmental company that has banked with Highland for years, and they’ve gone through ups and downs, and consecutive years of negative cash flow and then a couple years of positive cash flow. And the bank has not asked them to pay anything off, but consulted with them to work through the situation as a business adviser.
Rick Brimacomb: A gentleman in the audience was thinking of going into a new geographic market. What thoughts do you have on that issue?
Tom Siders: Don’t assume the new market is the same as this one. People do things differently from market to market. So if you’re thinking of going to another market, conduct a market study. Talk to bankers there, other businesses, to find out the strength of the market, the reaction in that market to someone from the big city coming in and maybe knocking out a local business. You don’t want to be the SOBFOOT, the S.O.B. from Out of Town.
Patrick Maloney: It goes back to knowing why you’re successful, will that work in another market. Is there a way to pilot it, to test that you’ll be successful before going all in.
Rick Brimacomb: Take it up a level to a leadership perspective: what can leaders do with this topic in mind?
Tom Siders: Business owners should be talking to their employees and soliciting input. Business owners pay us some pretty nice checks to go in and talk to their employees and employees tell us everything that’s wrong, and they don’t dare tell it to the owner. I love the concept of lunch and learn. Pick a topic, buy your employees lunch, and tell them what’s going on.
Patrick Maloney: What are the key drivers to your business, and then you repeat, repeat, reinforce, involve. So to me it starts with knowing what’s the most important three or four things.
Rick Brimacomb: Give us your action items for people to focus on first.
Dan Moshe: I’d say asking those around you, especially those millennials in the organization, how can we better use technology in this company? They’re generally very savvy with apps and tools out there. You might be blown away by some free tool that’s out there that could revolutionize your business, and someone on your staff already knows about it.
Patrick Maloney: The starting point is to have good, solid financial information. If your gross margin isn’t where you want it to be, if the cash flow is weak, those are the first things to address in your business.
Melissa Johnston: My action items are going to be fraud prevention, to make sure your company isn’t exposed to risk, and then the cash reserves, so talking to your banker, your accountant, to take care of negative things but also take advantage of opportunities. Also, think of joining a peer group, to gain advice and have a sounding board.
CONTACT THE EXPERTS
Rick Brimacomb is managing partner at Brimacomb + Associates and Club E: 612.803.3169; ri**@*******mb.com; www.brimacomb.com
Melissa Johnston is a vice president at Highland Bank: 952.858.4798; me**************@***********ks.com; www.highlandbanks.com
Patrick Maloney is operations director at
DS+B CPAs + Business Advisors: 612.630.5097;
pm******@*****pa.com
Dan Moshe is founder of Tech Guru:
da*@********it.com; www.techguruit.com
Tom Siders is a partner with L. Harris Partners: 952.944.3303; to********@*************rs.com;
www.lharrispartners.com
Edited by Beth Ewen
Photographs by Jonathan Hankin
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