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.
DEAR INFORMER: I heard a business owner say that she swears by monthly accrued financial statements. Exactly what are these, and how do I use them?
DEAR NON-CPA: At last! A question for all of us who hung out in Brit Lit, Anthropology for Fun and Profit, Elvis and His Influence on World Political Systems, and anything else we could think of instead of accounting class!
Vicki Johnson, a certified public accountant and a senior manager at Wipfli, the St. Paul-based accounting firm, went to all of those classes we missed and then some. She says accrual-based financial statements are valuable to business owners because they connect expenses with their corresponding revenue, with no time lags.
“It’s matching,” she explains. “You record expenses as you get the bill. You record revenue as you send the invoice.”
By contrast, cash-based financials, often used for tax purposes, might separate the two, for example, accounting for revenue when payment was actually received, long after an expense related to that revenue was incurred.
(By further contrast, see Enron, WorldCom, and Tyco….but that’s another subject. The stuff we’re talking about here is all legal.)
The advantage? Business owners “can monitor things more closely,” especially gross profit percentage. That should be the No. 1 thing you study when you get those financials, Johnson says. “Is the profit margin according to plan?” Or, does all that money you’re paying Susan in Sales correspond to an appropriately sized order from Calvin the Customer?
Also, look for swings in expenses, especially things you can’t immediately account for. It’s easier to spot something that’s amiss before weeks or months have passed.
Johnson says it’s a bit more difficult to prepare accrued financial statements, and hence more costly if you’re having an outside firm do this for you. But it’s probably worth it so you can connect the dots more easily between what’s going out and what’s coming in.
Also, firms with more than $10 million in annual revenue must file accrual-based tax returns, not cash-based, so even if you’re smaller than that you might as well get ready for the grand and glorious future.
P.S. Anyone who went to their yoga class or golf clinic instead of reading this item, shame on you.
Vicki Johnson, Wipfli: 651.636.6468; vj******@****li.com; www.wipfli.com
DEAR INFORMER: I get one invoice that says I owe in 10 days, and when I don’t pay on time I get an interest charge the next month. Meanwhile, one of my vendors pays me in 90 days! How can I experience more of the former and less of the latter?
DEAR RECEIVABLES: First let’s talk about billing. You have to treat all like customers alike, in the credit terms that you extend, says Pam Krank, president of The Credit Department Inc. in West St. Paul.
So you can’t say this customer can pay in 10 days, but this one must pay all cash, and this one not for 30 days, if they’re all the same type of customer. (The exception is, if a particular customer poses a special risk you can have separate terms for that customer.)
Krank, whose company manages collections and accounts receivable for client companies, says that many companies use “net 30 days” as their terms without thinking it through.
“People use it as a default, and it’s a terrible default,” Krank says. Why? Let’s say you own a service business that bills once a month. If you provided services the first week of one month, and billed at the end of that month, the customer has 30 days more to pay and meanwhile seven or eight weeks have passed.
“You’re out all this money now,” she says, and yet you’ve had to pay the expenses associated with that service weeks ago.
Worse, and even more common, she says, is many companies extend credit to a new customer without any agreement or credit check at all.
“You don’t just grant credit,” Krank says. You don’t just go to Target, pick up a bunch of stuff and tell the cashier you’ll pay later. “But small businesses do that all the time.”
Target makes you fill out a credit application and gets you to agree to terms first. You do that, too: give the new customer an application, which spells out your terms, including any service charge if the terms aren’t met, and get the customer to sign. Also check that bank reference, check that credit report, every time, Krank says.
She believes service businesses should always keep their terms under 15 days, and better yet due upon receipt.
Then, bill often, Krank recommends, “daily, weekly or at the most bi-weekly.” Manufacturers should bill 24 hours after the product is shipped. That way you don’t have too much risk outstanding.
If a customer misses the date, call. Check to see if there’s something really wrong. Never, ever let someone go 90 days. “If a guy’s getting paid in 90 days he’s doing something wrong,” Krank says.
Large companies can live with large accounts receivable, because their vast resources can absorb the wait. Small companies often fail because they don’t manage AR, and they can’t absorb a hit.“Look at your receivables like a portfolio at risk,” she says. “It’s not like having a building that just sits there forever. It’s like having a building with pieces on fire, and you have to figure out which pieces will smoke and go out by themselves and which will burn the place down. You can’t act like it’s cash or a solid asset.”
Pam Krank, The Credit Department Inc.: 651.451.0164; pk****@*cd.com; www.tcd.com
DEAR INFORMER: I’m thinking of becoming a franchisee. How do I investigate my options?
DEAR FRANCHISEE: Chuck Modell heads the franchise group for Larkin Hoffman Daly & Lindgren in Bloomington. He offers this advice for anyone looking to buy a franchise.
Before you hire a lawyer, he says, before you hire an accountant, get the franchisor’s offering circular. Item 20 has tables showing how much owner turnover there is in the system, broken down state by state. “If it’s really high, pay attention,” Modell says.
The circular also has to list all the franchisees in the country, with name, address and phone number, including anyone who left in the last year. “Go to Sam’s Club and get the biggest phone card you can, and use it,” Modell says.
Call franchisees that are in similar markets to yours, and in similar circumstances. For example, if you’re going to be an absentee owner, call absentee owners. If you’re going to be a hands-on operator, call hands-on operators.
“Most will talk to prospective franchisees. If they hate it, they can’t wait to tell you about it. And if they love it they want the system to grow,” Modell says.
Probe for details, he says. The two themes you should be listening for are, “I get a lot of support,” or vice versa, and “I’m making money,” or vice versa. “You don’t want vague answers,” Modell says. “Dig deeper.”
Ask, what was the training like? How long did it last? Do you have to do your own buying? Does the franchisor provide supply catalogs and order forms?
Most importantly, get specific on profitability. “If you are somebody who needs $100,000 to live, and you’re talking to someone who needs $40,000, their measure of success is going to be different than yours,” Modell says. “Probe further.”
Overall, be sure that you are franchisee material. “A good franchisee is an entrepreneur who can run a business, but who is not an inventor, and not going to want to change the system. You are buying the system of the franchisor. It’s ultimately the franchisor’s decision whether you’re going to add ice cream to the menu.
“If it’s somebody who’s always re-inventing the wheel, that person is better off starting their own thing or becoming a franchisor,” Modell says.
Chuck Modell, Larkin Hoffman Daly & Lindgren: 952.896.3341; cm*****@***********an.com; www.larkinhoffman.com
