Long Term Business Planning in your business is always important. This can range from financial planning to be sure you have the proper lines of credit before you actually need them or planning to sell the business, way before you are going to.
I always tell people in the home service niche is, “If you have a few good years under your belt and you feel good, get a line of credit. Not because you need it today.” A line of credit doesn’t you any money to use that line and so many businesses, when they have the line of credit, they’re able to pick up stuff that they normally wouldn’t. Let’s say a business is going out of business and you hear about it. They’ve been around since 1942. You talk to old man Shevitz and he’s willing to get rid of the business for pennies on the dollar. He’s just had it, he’s done! He’s moving to Bermuda. He comes to you and you say, “Well, I don’t have any money.”
Be Prepared
If you would have that that line of credit and it’s sitting there, and it’s ready, you can pick up bargains for pennies on the dollar. That’s why I think it’s so important to get that money ready because believe it or not, and I’m sure you’ve been through this a million times Craig, it takes a while. Especially if you’re dealing with the government on the SBA process, right?
Oh, yes, yes. It’s always better to get that line of credit before you actually need it.
I mean, that’s what I’ve learned. When you’ve got it ready it’s there. You can then … you need to buy two trucks? You got the money to buy them. Let’s say I’m a small business, and this all sounds good and dandy, but I still don’t know the first thing about finding a CPA. From your experience, what are you looking for to make sure you get the right person doing your taxes? I mean, because a lot of people right now are saying, “My mother-in-law does my taxes. She does them great,” but I don’t really think that’s the case a lot of the time.
No, no, no. It’s definitely not the case. What you want is you want somebody that’s going to communicate with you and is going to allow you to communicate with them, answer your questions, and also going to come to you with … I like to say to tell people, “When was the last time your accountant came to you with an idea to save some taxes?” You want somebody that’s going to give you proactive advice, not just putting the right numbers in the right boxes, but they’re going to be proactive.
Absolutely. What’s three questions that a business owner should be asking the CPA on a regular basis?
Communication
How often do you communicate with me? Do you provide me with proactive services? I guess the third would be do you have a team around you to support you when you’re not in?
Right.
As you grow you want somebody that you could call up and get an answer to. While a guy that’s a sole practitioner could do really, really good work he does get to go on vacation. He does get sick. You want to make sure that you have a real team around you versus the bigger you get you definitely need that team.
Yep, that’s absolutely right. I mean, when you talk about a COO, a CFO, you talk about having even a CTO which, you know more than I do probably how important technology plays. I’m sure you guys aren’t doing things on a big notebook ledger, you’re doing them now in a sophisticated software. Am I right?
Exactly. Yes.
Cash Flow
I have a CFO. Pretty amazing guy. He knows his stuff. What are five non-obvious things you look for if you’re a CFO, that you would look for to make sure the company’s doing great financially? I mean, it’s so important because a lot of small business owners don’t look at this stuff. What would those be?
Well, you want to look at your cash flow, cash in the bank. You want to look at your receivables and the aging of the receivables. You want to look at your payables. Are your payables building up over time? The same way with your receivables. You want to see how old are your receivables. Are you getting paid? You know, it’s great to bill but if you’re not getting paid wat you bill what’s the sense?
Right.
You want to look at, you know, are you depreciating everything the right way? Are you taking advantage? Are you being proactive in your planning? Those are the main things you want to look at.
If I was to look at a company and I just walked in there, and I sat down, and I’m a CFO or maybe a CPA, I know there’s some things, quick ratios and certain ratios. If I was really looking at either, let’s say, selling my business or let’s say potentially buying a business. Obviously I care about cashflow, butthe biggest thing when I buy a business I look at how big is their clientele?
Do they have two really big clients so if one of them drops off and stops using us am I losing half of my income if I buy that business? The more assurance the more clients you have. If you got it spread out among 1,000 a month it’s a lot better than being spread out between five. If you lose one of those five you lose 20% of your income. What are some of those things that I’m looking for if I walk in and I’m thinking about buying a business?
Well, you want to look at how diverse is the business? How diverse is their clientele? Is it just that one big one and a couple of small ones? Is that risk spread out because there’s multiple clients of about the same size? You want to kind of … when you’re selling something it’s a process that you should go through and plan for that, you know, so your books are really clean. You’re taking advantage of everything.
We had a client where they sold the business and we were able to go back and we had certain add backs that we said, “This guy’s taking a salary. He doesn’t need to take a salary so high.” We actually raised that number so when you use the multiple the business was valued at a much higher rate. You need to look at the financials and really it’s not just all the numbers. It’s the diversification, all right? It’s how people are paying, what’s the cost to acquire a client, what’s the average life of a client? All those things should go into it.
A lot of the people might have 10 years of succession planning. I went to a convention. It’s a garage door company. They had succession planning. The room was packed. I’m talking packed to the brim. There was people standing in the back. It was the most well attended class they had. People really were struggling to figure out what EBITDA is but EBITDA is just a fancy way of saying profitability for the business, and there’s some add backs you can do. I mean, tuition and things that if you’re supportive with your people there’s obviously your add backs. Then we look at it and they go, “Well, all my business is worth is two or three times my profit?” Because it’s a small company, yeah, it’s not worth more than three times … I mean, you might be able to get four depending on the business.
This is not a universal rule, but typically in the home service niche you’re going to find that you’re only able to get three, four times as you grow. Let’s say you’re doing over $10 million a year. The reason why other companies and especially the big … well, the funds, they start looking and they start saying, “Hey, I’ve got all these shares. I can just raise capital for my shareholders. I could buy this up and it’s a machine.” When you hit $100 million it’s not uncommon to get 12 to 14 times EBITDA because if you go away you’re not going to destroy the company.
There’s obviously checks and balances in place to be able to do that kind of money. The funds would love to eat up something like that because they can go raise $100 million in their sleep. Then they’ve got another vehicle that’s making money. They’re always going spend money in a good opportunity. Talk to me a little bit about succession planning and what the people on here that may be looking to retire in the next five to 10 years have to start thinking about.
Well, you don’t want that business just to be based on you. You want to have an executive team in place because that means if I come in and I buy it I shouldn’t have to skip a beat to maintain everything that you’ve been doing. Whereas, if you’re the guy doing everything and everything is in your head, which is very, very common in a lot of small businesses. If you’re not there everything collapses.
The value is in having a team, and as you grow you make sure you have that internal team together so the value of the company. Obviously you also want to make sure your clients are good payers, all right. That always helps. If you’re getting paid net 15, net 30, net 60, net 90. The longer your payables are the less valuable they are, but the more that they’re going to be written off. Those are things you want to look forward to. That is a long process. It doesn’t happen over night.
Yeah, it doesn’t. You have to start thinking about, typically when you look at a business you’re looking at the last few years minimum. You want to have a record so if you’re going to sell in the next five years start thinking about making sure … Zig Ziglar, there’s all kinds of great people they say, “If I was to sell my company today, what would I have to do to get ready? Who would I fire? Who would I hire? What would I have in place? How would I not be so reliant on myself?” Those are great things that you need to start asking yourself today is, why are you waiting until the company’s … you’re ready to sell it to do these things?
Start doing them today because when you look at the last three years, and when you wonder why we ask these certain questions Buyers are going to want to look at your call records. I’m going to want to look at your financial statements. I’m going want to know how many customers come back and how often. All these things are important to a lot of people. The best advice is I would say is before you give this up to anybody make them sign a very comprehensive non-disclosure agreement because they’re going have access to a lot of stuff. Any CPA or attorney would tell you that.
Right, and you want to have systems in place so all those things happen. Like I said, it doesn’t happen overnight. It takes a while. You should be doing this way before you’re thinking of selling a business because you never know.
Yeah, that’s a great point. You never know when you’re going to want to get rid of it. I see people sell their business for pennies on the dollar because something happens family related and they have to get out.
YOU SHOULD REVIEW THE THE NEW TAX LAW CHANGES WITH YOUR CPA BEFORE IMPLEMENTING ANY TAX PLANNING STRATEGIES.
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