Build Value in Your Business
The next segment we're gonna talk about is how do you build value in your business? Now I know that a lot of us are not going to go out there and actually sell our business, although I think that probably Yogi Streams. She would love to be able do that, or perhaps the music store. This section is about selling your business, but most importantly, how do I really build value in my business? So it's not just about me. Remember we talked about in the first day that if you have just a job, you don't have a business and having just the job. If the company is all about you, then you really don't have that much value because what happens when they take you at the business? If you get run over by a bus, there's really nothing that goes on there. So that's what we're gonna discuss really next because remember, I love this statement, not building Valley, because your company is really not about you and building your ego. That may feel good in the short run, but it's really not so sustainable kin...
d of business. And we talked about that. The Valley of your business needs to be based on one of these things, right? What is the business really worth without you? And if you take a business like Yogi Stream right, Karen may add value to the business now, but hopefully when the business comes valuable, the real value is the instructors are on their videos, their their the interaction that happens with students and the teachers. That's really where the value is, right for Shana. What is really valuable is that store may have been around for decades, and they have people that come back to it time and time and time again. And that's really the intangible value that is. It's not just because she now works there, so let's go to a couple of different things. I do a lot of selling of various businesses, is a registered business broker in Illinois, and people always ask me this questions. You know, when's the right time to sell your business right? Well, the answer is when it's worth the most amount of money, right? But the question is one Is that really the right time? How do I prepare actually to sell the business? What is the process? Look like, how did I maximize the money that you keep? Because, remember, it doesn't matter how much I sell my business. Four. It matters how much you actually have in your pocket at the end. And who can really help you. So I always say the right time to sell your business is when the prophet and the Passion they're no longer both in the picture, right? You want to make sure you have profit and passion together. But if you no longer have passion and your profit is sinking, you probably passed the time where you're sold the business. You really want to still have both those in, because then you're selling it really? At the top of your game. But one of the most important questions that I believe that any small business owner should really ask is And the question I always ask if someone says I want to sell my business, What are you going to do the day after you sell your company and I get all sorts of things like, Oh, I'm gonna retire. I'm gonna go sailing. I'm gonna go play golf, right. I'm gonna do whatever I want. I will tell you That's not a really good answer, and you will be this satisfied. Doesn't matter how much you sell your business for the second most important question, really. Is this one? How much money did you keep after taxes on the day of the sale? And the reason they say on the day of the sale is the, um, only money that you actually could be guaranteed that you're gonna be able to keep is the money that you get when you sign the paper. Sometimes money has promised into the future, or there's some kind of note that's promised somewhere down the line. You've given owner financing, but it's really how much money do you get the day that you close the deal? Because there really is this tug of war that's going on between the buyer and the seller, right? The buyer wants certain things, and the seller wants certain things, and here's some of the things that they're gonna be tugging a war over. So think about this. It's really, really a continuum. The money at closing the seller wants all their money at closing. But guess what? Not surprised the buyer would like to give none and just promise it later warrants and guarantees. This is what you're gonna say is true about your business. The seller wants the promise, only a few things. But of course, the buyer wants everything in financing. The seller doesn't want to finance a the purchase price. They would like to sell it to give them all the cash up front. What the seller would like to do is, well, I'll just have you a seller by in earn outs and earn out means that you will get as the seller a certain percent, based on how the company does in the future. Of course, the seller wants none, and the buyer, like many Taba transaction, the seller would like a stock transactions. So then get capital gains treatment for that sale. And, of course, the buyer would like to have an asset purchase. And, of course, the government makes sure that someone pays the darn taxes so you can't really have it both ways. And then there's always some money that's put in escrow to secure the transaction, and the seller many times wants 10%. And of course, the buyers is on off putting the money in transaction. I'm just gonna I'm just going to sign the letter of intent. What do buyers really value? Remember, they value something that strategic to them. If they can take your business, fit it into their business, and it leverages what they already have, and that is really valuable. They also value companies have a 25% profit after ad. Bax. So what's an ad back? And add back is money that you take out of the business as an owner, perhaps arena as a business expense, that the new owner would have it as an expense. So that's really what they've out and remember, And this is the most important thing numbers really equal power. If you have strong numbers and strong access for the financial information that we just talked about, you're gonna be able to sell your company for a heck a lot more. Let me go through the 10 step process. It really happens. First, we have to ask the question, Why the heck do you want to sell? If you can't answer that question, we shouldn't really go through the process. You have to assemble all the materials together. People usually choose a registered broker to help. The broker produces some kind of sales document. It's very familiar to a very familiar to a business plan, and then the broker introduce you to people the buyers usually visit. There's usually a non binding letter of intent, which says, I'm gonna buy this business for X, but I'm really not promising to buy. If I find anything wrong, then you go through the due diligence process where you do all sorts of things, finding more about the business people negotiate a purchase agreement in 22 lawyers, and then they close. How long does this take? This usually take six months or longer, and the things that hold it up usually are bad financial records, which after this class, none of us could have bad financial records. Right? Bank financing, government approvals are sometimes the lawyers get in the way because they want to prove the under that they mome or so you have to make sure you pick the right lawyer in this whole process. The broker also puts together a cell packet and what that is a one page executive summary. Three years of financials in a confidentiality agreement. We talked about what an ad back is one. The question. I guess all the time is what is my company worth? What's the company worth right? What is what is Yogi Stream worth? What is the What is my music store really worth? It's really worth what someone will actually pay for it, but mostly it's worth 2.5 to 10 times cash flow. Cash flow really is the cash profit that you have at the end of the year again. Another reason that cash flow is so important. People don't pay for profit. They pay for cash flow. They said. The most in powerful weapon is those numbers, and we have to be really careful about. Is any of those skeletons really in a closet? I've seen a lot of skeletons in closets, and they think they're going to hide it. The buyer, the seller things. They're gonna hide it from the buyer. But they're not going to. If there's any due diligence at all, it really goes on. All right, So what is due diligence? Really like now? I won't mention some of those mawr invasive medical procedures that I know some of us over have had to have, but it's exactly like that. Basically, they're going to tell you over and over again that your baby's ugly and it is pretty painful. But if you're gonna go through the process, then you'll have to actually withstand it. What is really needed before you start three years of financial proof? Any ad bax. Know what your payroll is? Know what? All. If you have any losses in your business and then explanations for what you need, you'll need all the stock certificates and mortgage if there's any pending litigation. So you actually have to collect quite a bit of information. What kills a deal inaccurate or inconsistent information? Or if the story of why you're selling the business of what's happening, the business actually keeps, keeps changing. Or as I had in a similar deal, I'm just working on sinking revenues will sink the deal or have to re negotiate what the deal is. Finally, loose lips sink ships. You have to make sure that I'm both sides right, that people keep the confidentiality and who gets paid right. There's going to be professionals. The broker usually gets a percentage of the deal. The lawyer is going to get paid for whatever they worked on, the account will get paid to set the tax terms. So I know many of you are not yet thinking about selling your business, but you should think about what adds value to that business. We have some questions coming. Absolutely do this portion. Now I know what we have. A lot of people out there in the audience who are photographers who work in seasonal businesses, a lot of wedding photographers. And that's where this question comes from Cassandra. And they want to know how you should allocate your money. If you're in a seasonal business. Now, do a lot of these things that you're talking about. Do these apply to someone who had? There's no question there's no question the first. The first answer really comes from is how much money do you actually need to live during the off season? And where can I put that money during the season so I don't steal from it when I'm needed for offseason? Right, So that's really what the thing is. You see, a lot of it's interesting. Teachers usually work 10 months at a year, but many of them get paid 12 months of the year, they just the via their revenue more evenly. So I think it's very important to allocate that profit first. So you have some money for the times when you don't you're not working or you're not as busy. Great. So now we're gonna take another Skype guest. I want a welcome Jennifer War awa from Sage. She's the vice president on Joe Magic of Save Account Solution. Jennifer, welcome to Creativelive. Now there are some questions that actually came up that I said no, Stop asking those questions. When Jennifer comes in the line, we're gonna ask her Those questions were talking all afternoon about money and numbers and financial statements. And you know that small business owners really have a difficulty understanding what financial statements are and what they dio and the questions came up over lunch is I know I need a new account in order account. Where the heck do I look? Yeah, that's a great question. I mean, I think that, uh, you know, one of the great places to look for an accountant is ask for a recommendation or a referral from someone who's really happy with their account. I would probably advise that some people are happy with very little. So so all. I've looked to someone who has high expectations and who is getting what you want out of an account. So your client on the right fit for you because this is someone else's happy doesn't mean they're going to meet your needs. So I will. Recommendations are great source also course online, and I think you know, there's actually a large number of accounting firms that don't have an online presence yet, But you probably don't necessarily want to be dealing with those terms to be honest, because you want someone who's progressive and with the times, they also want to be able to go to the website and look at blocks or their social presence to understand how they're sharing the knowledge that they have online, because there's a lot of great information to be had those air to places I would definitely start with. I was looking for a new account, Jennifer one. The Biz. This connects with small business owners that their financial literacy doesn't match the financial literacy of the account. In other words, the account is trying to give them good information, but the business owner doesn't really have the knowledge to build. Understand that. How do I work on it? So I know I'm getting the right account that can actually match my financial literacy. How greater? How small it is. No, I think that's really important, because I think when you're talking to an accountant, you want to make sure that you're speaking the same language. And actually, the accountant should be speaking the business owners language, not vice versa. So times out here from a business owner, you know, I met with this accountant and I felt really inferior. I didn't feel like I knew what they were talking about, just like, Well, you shouldn't really completely no every talking about because you didn't go to school to be an accountant. So that's, you know, that's not necessarily your role. What you want is someone who can translate it for you. So if you think about it, they're speaking this financial language, and you want them to take that financial data, turn it into insights and then translated into your language. And so when you have those conversations, if you ever feel like your inferior or lost or not getting develop you. You probably have the wrong accountant, to be honest, because they should be able to talk to you in a in a language that makes sense to you where you can translate that into business results. Word should I use? Because I know a lot of small business owners aren't comfortable because they feel like they're gonna look stupid. What kind of words or phrases can you give us if you don't really understand what the account saying? Teoh, where some catch word you can use that will make you feel bad and that will make the account feel bad that they understand that they have to slow down or change their tact. Yeah, I think my first point is to never feel embarrassed and just be really honest about where you're at. And a lot of times people would rather listen and pretend that they know what the account exactly. That would just be honest. So I think the first step is just saying, You know, when you're finding that right, accountant Justo have the conversation and say, I just want to be really clear with you what my financial literacy is, and lots of times when a business owner starts their business. They're really passionate about what they're doing. You know? What are you talking about? A number of different kinds of businesses in your last segment. And I think you know, whether it's a record store or ah bakery, that's their passion. That's what they need to be really good at. And so I think, just being able to talk to the council. This is what I'm out with my financial literacy. You know, I can I can bake pies or I can run a bakery like nobody's been. But when it comes to financial, if I want to let you know where I'm at and I want to know where you comfortable talking to me at that level because I really don't understand this, it's important stuff. And so you should never discount say, Well, it sounds like they know what they're talking about. That's good enough for me. You really want to understand when they're saying so? I think you know, a business owner knows I want to know. If I'm making money and your account, you shouldn't need to say I want to understand my gross profit margin or I want to understand my income statement. It's like I want to know, Am I making money? And my We're spending in certain areas. How'm I doing compared to other businesses like mine? And that's pretty common, straightforward language. You should be able to use that and get answers back that you understand. So, Jennifer, if you're not getting the answers you need, when is the best time to switch an account? Because a lot of people you know they only meet with their account once a year. They're afraid it's gonna interrupt with taxes. When's a good time to do it? Can you switch the middle of year or can only be at the end of some kind of fiscal year? Yeah, that's a great question. I mean, I think that it is so important that I wouldn't wait, so I wouldn't say you know what? I'm gonna go through, like some people say I'm gonna go through the rest of this year were in June. Right now, I'm gonna go through December. Well, that's that's another six months. You're only halfway through the year, so I think the best time to switch is when your replies that you have an opportunity to do better or to have a more valuable conversation because you don't know the next six months could be extremely critical for your business. And if you don't get the right advice at the time, you'll you kick yourself later for not listening to what you knew to be true. And it's time to make the switch so it might not be is convenient. That's in the middle of the year, but it's always It's always an important decision, so you should do it when you know the time is right for you. Don't wait for that fiscal year break. So if I want to learn as a small business owner Maura, about how to read financial statements, understand what they mean, what resource is you recommend the small business owners that they can educate themselves on their own. Where can they go? Yeah, I think there's a lot of resources online. I mean, quite honestly was talking to someone the other day and they were just saying that they did. They watched a whole bunch of videos on YouTube. There's great content on on websites about reading financial statement. There's a lot of I mean of course course if you want to go and take a course in your local area. Lots of business development courses. I know you do a lot of education on how to understand the financials, but there's a lot of people who will make it make sense the part where you know you can understand how to read financial statements. But the part that the accountant can bring in is translating that into insights. And that's the part that a business owner sometimes misses the like. No, I understand profitability, Understand how to read my income statement or my balance she. But it's actually translating that those insights that impacts business decisions and that is extremely critical. So I think that's the part where just understanding the financial statements is the beginning. But then, from there, what's the next critical step? Now I know that I'd say you have a conference once a year that really helps small business owners, Gates insights into their business. Just give us a short commercial for that because I think so many 1000 small businesses come together a year, and I think it's so important because not just read the numbers but understand the insights. Yeah, absolutely so We have our conference coming up at the end of the July at Sage Summit and the website sage summit dot com. And we have a lot of different speakers around all different areas. Your business, including accounts we have CPS that are gonna be speaking about a van around understanding financials, making them relevant for your business. We've got people talking about marketing and social media and digital and online. So if you're a business that has no employees or a business that has 1000 employees, there's relevant contents. There's all kinds of great places like that where you can plug yourself in, immerse yourself in this learning for a couple of days, and then and then kind of come over fresh and taking a look with some different perspective. And I'll also be there speaking about how you got to be crazy to start run your own business. So it's always a fun time. Jennifer I wanting a couple questions from our studio audience here, and right now I want to really start with you because you asked the question. I thought Jennifer could answer in the last segment, which is about okay, I get a piece of software. Whatever. Really? That is. If that's h 50 or I get QuickBooks, how do I get help? Actually, it set up my chart of accounts. I think you're asking that question. Want us, Jennifer? That? Yeah. So I was curious to know, Um, first, I don't really know the difference a whole lot between accountant and a bookkeeper, and then how often to see them during the year and then to set up an account. I actually haven't heard of your software before, So this is the first time I've Well, we're talking to General. I I Yeah, I would love to know. You know what? How? How an entrepreneur should be searching for the perfect software for their business and how to get it set up and what to do. Like a step by step. Um, you know, So let me handle this guy. I mean it onto that. How do you pick the right software, Jennifer, for your business? And how do you get assistance and setting it up? Because if you set it up wrong, especially chart of accounts, you're gonna have a mess on your hands, right? Yeah, absolutely. You want to send it up. You want to set it up right? There's a couple different questions there. I'll start with the software piece. I think, you know, I think, What's time? People will find a software, for example, that they think, you know, in in 10 years I plan to go public and be this multi $1,000,000,000 enterprise. So I need something that's going to serve me forever. So I think you want it. You want to find the right fit for you. That's quite for where your businesses at today. So no, I'll just put a plug in there for Stage one, which is our cloud solution for small businesses and start ups. And I think it's it serves business needs well because it's simple, and it's easy to use any time anywhere. And that's a great fit for startups. You want to find something that fits for where you're where you're at now, not necessarily where you're gonna go for the rest of your business life. I think when you're trying to make sense out of which solution is right for you, there's a couple different approaches you can take. I mean, I think actually talking to an accountant or bookkeeper is a great place to start because if you find someone you're gonna work with, you want to find which software solution they recommend, because at the end of the day, they're gonna be the one supporting you. So when you find that right it, then they can help you help you make that software decision and get it set up correctly. Um, And if you sometimes people want to pick the software before they actually get to the point of getting an account, in which case, some of that online research or checking out what works for you. Most products now you could do a trial so you can try it out and say, Is this easy enough for me? Is it gonna fill the needs that I have today for my business and see what is simple and easy to use? And so the other question Jennifer was what is really the difference? And I hear this a lot arena between a bookkeeper and accountant and do we need both of them or I need just one of them. That's interesting. So in the in the US, those two were actually used almost interchangeably lots of times someone has more of a bookkeeping firm and they refer to it is an accounting firm. So obviously CPS or credited CPS, which is, you know, that at a higher level of accounting. So I think what you want to find out is it's more around the role that they're gonna play in your business. Then this thing they call themselves in accounting or bookkeeping firm. What do you need them to be able to do? For example, if you have international tax or you do international business, you want to find a firm that serves people who do international business? It's not just a vote, you know? Is that are they a bookkeeper and accountant or C. P. A. It's really what your business needs and then finding that that right fit. And then you asked about the frequency of engaging with them, and that really depends on on where your business is going and where you look for that strong partner. So I think if you find the right strategic accounting firm, they could be a great partner to your business to bounce ideas off of. I think some people think of accountants as a tax adviser or this compliance person. But when you actually have somewhere you could say, Hey, I'm thinking about hiring my first employee or my 10th employees or getting my next business loan or getting a new piece of machinery or equipment. That's a great time to have those conversations to because someone will say, Oh, I just had a client expand and these were some of the the areas that went wrong And they can give you that advice in perspective you may not have been able to get without someone who has that overview of businesses. They can provide great advice and people, So I don't want to spend the money right now waiting time a little bit further along the savings on making bad mistakes. But if you make a bad mistake, it could be very, very expensive. And so they can help you make the right decisions early and save money in the long term. And this is very interesting because I talk about in my first book. I made a lot of bad mistakes. I wasn't using account, and, you know, I forgot to remit my employees payroll taxes to the government. And you know something, Jennifer, they get upset about that, right? I don't like to collect sales tax. You don't give it back to the government. So it's really important when the points you made Jennifer which everything is so important, is that the account is really not just the tax person. You really should see them as a business adviser. And if they can't talk about how well you're doing compared to other people in your industry, it's probably time to go talk with somebody else, right? Yeah, absolutely. I mean, they should be able to have a conversation with you. You know, one of the common question we get when we're talking to businesses is I don't know if I'm overspending like I'm trying to get perspective. I pay X for insurance. I don't know if that's a lot or a little bit, because they just haven't had the insight into what other businesses spend. And so that accountant can help with benchmarking are those comparisons and they have a broader perspective. They have connections, they have a professionals they work with, and so there's so much more than that tax and compliance piece. I mean, I don't I don't discount the value of a great tax adviser or the role of a yea or account keeping you compliant. That's extremely valuable. But the real value is in that partnership between, you know, an accounting professional and this fitness where they're having this ongoing discussion. It shouldn't just be once in a while. It's kind of an ongoing business discussion. Yeah, I think that's really important. He talked about Jennifer. One last point I want to ask you was about how often should I meet with an account? Now we know that should be more than once a year. Should it be quarterly? Should be monthly should start out more frequently. And then when you get an understanding what the numbers are, you go less frequently. Yeah, that's a great question because over the last little while, as we've seen technology change, it's actually shaped the relationship between an accountant and the business owner, for example. So in the past it was like, Well, it's a lot of work to get all my data and all my bookkeeping over to my account. Then they have to review it, and so I'm not going to do that more than once a month or once 1/4. Well, now with cloud. When you have your data in the cloud and it's flowing in from your bank and your credit card, he count concededly logging and take a look and see what's going on in your business. It's always easy to diagnose a problem after the problems already occurred and say, Hey, it looks like you missed payroll last month or last year or last quarter. Well, yeah, I noticed that myself, actually, when my employees showed up and said that you know, this check bounced or whatnot. So I think you want that really time insight. And so I think technology gives the opportunity for real time conversations between the business owner accounting professional. Take advantage of that and make sure that you're having that real time connection because they should be able to call you and say, Hey, I just take a look around your account software. I was logged in online, and it looks like your cash flows a little bit being fine. We're seeing your receivables. Three. Bob, what do you do about that? That's like that in the moment and fight still value important? Well, Jennifer, I really appreciate being with us Where can people learn more about sage and sage? Accountant, Accountant Network? Yeah, they can inch dot com and we got information that our solutions as well for the education and received some. Jennifer, thank you so much. We'll see next month. Great, Jennifer, around applause.