Financial Planning for Business Owners

Welcome to Building Better Developers, the Developer Nord podcast, where we work on getting better step by step professionally and personally. Let's get started. Hello and welcome back. We are continuing through our series of interviews and we are continuing our interview with Brent Allen and we're continuing to talk about the financial side of business. We've gotten a little deep. This is one of the things that is a little bit out of, I think, the wheelhouse of most of our listeners, but it is something that as you're learning, I think from Brent, that is something important for us to understand, to discuss, and to get assessments. That's one of the things that he offers. If you go out to the site, there's going to be a link. He's got a special offer for listeners to get a free session, to spend some time talking to him and get a lot better view of the financial situation of your business, what it's worth, and maybe give you some good tips on how to take it so that you can be successful or be more successful. I don't want to take away from his brilliance, so let's get right back into our conversation with Brent Allen. How do you really assess a company for the level of profitability? How do you look at them and say, okay, you can look at sales, but that's not necessarily what you're really going to be bringing in, obviously, because you've got all the expenses and things like that. How do you analyze a business to really get a comfort level of this is what the level of profitability is for them? This is our bread and butter. We go deep into the numbers. I'm talking about all the way down to every transaction, depending on the size, and then we run trend lines on everything. On everything you can think of, every single expense line item, every revenue line item, how your receivables and payables are coming in and out. That type of analysis will point out things. A lot of times we tell people things about their business that they weren't aware of as they're selling them, just because they're in it day to day in the weeds. The other thing I see, Rob, is people lie to themselves. They're not necessarily lying to you, but they think the revenue is 800,000, and you go run the numbers and the revenue is 600,000. Somewhere in their mind, they extrapolated their best month over 12 months, and they got it in their head that that's their revenue. There's a lot of folks that don't know their numbers. I would highly, highly encourage everyone, if you're looking at making an acquisition, to hire a professional. One of the key things I would encourage your folks to look for are professionals that can help make things simple, not complicated. It's difficult to find accountants and finance folks that seek to simplify versus complicate. I know that you talked about your listeners or developers. It's a lot easier to write a messy pair, five line piece of code than it is to write a really simple one line piece of code that will do a better job. Accounting and finance is no different. If you were out looking for somebody to help you do that, I would encourage you to talk to them about how they're going to help you make money. If they can't simplify, if they can't communicate to you in a very quick and efficient manner, what they do, how they do it, and how it can make you money, you probably should keep looking. That makes sense. We know the simplify versus complexify approach to things. In any industry, particularly from a consulting point of view, if it's much more complex, it makes it sound like it's a lot more reason for you to charge more money or higher rates and things like that. When you're dealing with particularly, startups, maybe solopreneurs or small companies, half dozen people or something like that, and particularly the first couple of years, how often do you run into situations where you're talking to them about, hey, I want to get on track. I want to start working on evaluation. How often do you run into a situation where you're like, hey, first, they don't have that information to get down to that buy transaction level that you're talking about when you're trying to evaluate something and figure out a profitability where they just don't have the processes in place to have books that are that. We'll call them pristine, I guess. Yeah, that's not uncommon. One of the things I see people shy away from hiring professionals, not just in this area, but in any area of your business, is you're embarrassed about the state of the current whatever of your finances or your sales team or your ops team or your HR, whatever it is. They think in their heads, they're going to clean it up, get it ready, and then they'll go get somebody to help them take a look at it. I would encourage you just to turn it over. From our side, we have professionals that just love to do this. They can get all your, if you got three years worth of data, we'll just grab every bank and credit card statement and transaction. We can build your books. We can do that in a certain amount of hours, get it all cleaned up, have you a good starting point for books going forward, and then do the analysis on that. In today's day and age, because you're not dealing with cash, the records are there, whether you have them inside of your QuickBooks file or whatever accounting software you use, and it's all reconciled or not. That makes sense. Yeah, and that's sort of what I wondered is it seems like a lot of times I'll talk to people and they're like, I don't really want to, I know I put this together, I've sort of got books, but I'm not keeping the cleanest number. That goes back to why you can't really tell whether you're making money or not, because you can't put the numbers all and line them all up to say, these are all my expenses and this is all my revenue. And then more or less, add or subtract your way up to either I'm making money or I'm not. And yeah, I've seen several stories where people are working their butts off and they're trying to grow the business and they end up almost tanking it because they're not making more money. Making more customers is actually a bigger loss to them. And the next thing they know, they're upside down. It's not an uncommon story. Well, and Rob, I've seen folks have profitable client relationships grow too fast without respect for working capital, making sure that they can float the AP and the AR and the cash and really run themselves out of cash. And they've got a great business. They're doing a great job. They just didn't have eyes on that in order to grow at 200% a year, they're going to need another quarter million dollars in funds. And if they see that coming, then I promise you, you can get that money for that growth. Do you mention earlier, because it is on our minds because we're coming into that, I think. I think it's unquestionable that we've got a recession coming at the very least. Things have changed financially quite a bit in the last few years between when you started at 2020, you had COVID and that impacted so much the speed of business in so many different ways. And now it looks like we're going to continue into this. What are some things, now you mentioned one strategy of looking at your worst case scenarios. What happens if we lose 20%, 40%, 80% of our business? Are there some other things that you recommend that people can look at to try to, if not recession proof themselves, but at least prepare themselves for that? And particularly if that's, because it is, it's a time that they can maybe get aggressive and go against the flow instead of just hunkering down and trying to weather the storm, say, no, here's the time. As you said, it's like, this is time to go grow. Yeah. I mean, man, I get so fired up. I want everyone of your listeners to get excited every time they hear the word recession. For the best businesses out there, for the best leaders out there, volatility is our friend. Whether it's going straight up or straight down, we should have enough information and we should be, if we're the best at what we do, it's the time that we can hire talent. You should be able to hire talent in the next six months. You couldn't hire six months ago. You should be able to go out and get clients that you couldn't get six months ago. It's just so empowering to have that variability. Your competition is going to slow down. They're going to start pulling in their marketing dollars. They're going to start trimming back their staff. They're going to start paring back their offerings and everything they're doing is going in the wrong direction. What I would tell you, Rob, I wish I had a simpler answer, but if you can have a detailed financial plan, if you can understand no matter what happens that you're not going to run out of cash, right? That's the only real risk of a small business is running out of cash. Everything else, as long as you got cash, you can go back and fix your mistake. You can correct. Whether that is cash in the bank or you go out and talk to banks about getting lines of credit for backups, even if you don't think you need them, that's how I position myself and then go get really, really aggressive. I know this is not the question you answered, but it came up in my answer. One of the things I would encourage your listeners to do as well is anytime the business is doing really well and you don't need money from anybody else, that's when you should go get lines of credit and get money from other people. Because the craziest thing about banking and financing is when you need money, you can't get it. When you don't need money, you can get it. If you're coming to the end of 2022 and had your best year ever, now's the time to go get a $100,000 line of credit or $200,000 line of credit. Hope you never touch it, but it's there when an opportunity comes or when a bump in the road comes that you're going to need it. Yeah, that was something that I ran into myself. I had done really well in 2018 and 2019 and had taken advantage of that. When 2020 hit, it really helped in that first three to four months when things stopped or slowed down or stopped so that cash flow went to about zero. I was like, okay, we can just coast through this. It did a lot. There's a personal story where it allowed me to float some customers for a while and say, hey, we'll keep working and we'll get caught up on... That's when you can go from a net 15 or 30 to say, hey, we'll give you a net 60 or 90. We're covered. We can do it. They're like, hey, that's great. Sometimes you can even slap an extra percentage on that or something like that and say, hey, we'll make a little bit more, but we'll float you. We'll make a little more in the end. Having the ability to do that, it's a huge piece of flexibility for a business. Rob, who do you think the majority of your listeners, their customers are? Are they generally large businesses or are they... I think most of them are going to be... It varies on what the form of business is, but generally, you're talking more small, like from small, like as in mom and pop type small up to... Also in size, so you're talking probably five to 15 employees up to maybe 50, 100 kind of thing. Then revenues can be all over the place in that, but six figure type things up to tens of millions, probably not a lot of fortune 500, although you do occasionally bump into those where you can get into a situation where it sort of goes back to that idea of having that one customer that's really big, should you get something that's sort of your launching point. A lot of times, a lot of these, especially as a developer, you work for somebody, you've gotten to the point where they really can't afford you, but they also can't afford to let go of you. You flip into that consulting role. The next thing you know, you've got that one customer and you're working in your business instead of on your business all the time. You're just doing that work and you're pulling in that money, but you're not spending that time growing. It could be a very large customer, but it's almost like a gimme to start out with it. You haven't really done some of the thought processes to build your business. Yeah. I just asked the question because of what you just said. Again, if you got cash, if you've got either cash in the bank or available cash through credit lines, you'll be surprised when you may be able to pull that lever, especially large businesses, but certainly mid-sized businesses and sometimes small businesses. They get into cash positions, cash crunches, whether that is a directive from own high to increase their working capital, or if that's a smaller business that is having a little bit of a tight cash position, you may be able to pick up not one or 2% margin. You may be able to pick up 10 or 12% by being able to extend your terms or flex your terms to what it is that they need. We could talk all day about credit and making sure that you don't end up with bad debts. You've got to protect yourself on that side. I've seen people really extend their profit margins by being able to extend their terms. That makes a lot of sense. That's one of those. It goes back to when you have the money, it's easy to get it. When you need it, it's harder. It usually translates into cheaper versus more expensive. If you really need it, you're going to expect that you're going to pay that higher rate versus if you don't really need it at all, it's going to be a very low rate, it's very low cost of having that money. Swinging back around to buying a business, I guess. In this case, I'm trying to think of how to ask this one because what are some things maybe that we would want to do, particularly in an acquisition? What are some things we would want to put in place to sort of position ourselves to buy a business? You talked about some retention and insistence and some things like that, but there's ones that we've talked about things to prepare you to sell a business. What are some things that you would recommend somebody do if they want to get to a point where they are thinking about buying a business? Maybe some things to either protect themselves or to put themselves in a position to most quickly take advantage of that acquisition. That's a good question. Generally, if I've got a business and I'm thinking about expanding through acquisition, one of a few things are going on. Number one, we're spending off more cash than we know what to do with. You're building a war chest. You're stacking up money so you can go out and buy a business. Let's go back to the business we were talking about that's doing $100,000 a profit a year. You're going to pay $500,000 and you're getting a five-year payback period. More than not, you end up with a valuation gap when you look at buying businesses. The person selling wants more money than the market wants to pay them. This is almost every deal I walk into and you have to figure out how to bridge the gap. A really great way to bridge the gap to answer your question is if you can build systems inside of your business that are scalable and that you can pick those systems up and put them in an acquisition and all of a sudden that business that was making $100,000 a year can make $200,000 a year, now you can go out and pay what the seller is asking for and get a better return than most people get through an acquisition. There's systems, whether that be your sales system, customer service, those are two really big ones, but how you execute in a really efficient manner would be a third one. The other piece outside of systems would be if you're great at talent acquisition, retention, training, and development. A lot of businesses stagnate because they don't have the next person up that can run that next office, that can run that next client relationship. I would either stack up, depending on what your particular business and what it is you're doing, I would stack up talent in the critical areas, go out and do the acquisitions, and then become more profitable and grow the business through that, and or I would implement systems that could scale beyond myself. We haven't talked as much about this, but what are maybe some things that you recommend if somebody wants to spin off a business? Let's say particularly you talked earlier on about entrepreneurs get into this thing and they love it and then they start growing to a point and they realize that maybe it's not just the general business, but they grew in a couple areas they realize they don't want to or for whatever reason they're like, hey, I want to keep part of my business, but I want to carve off a piece and sell that offer or do something else with it. Maybe there's some different things, but what are some recommendations to position yourself for that? You really need to have an absolute clean break. I would separate that part of the business, have it run on its own, have as little shared services as possible between the two, and as little customer overlap between the two. I would invoice separately. Acquires are going to be scared to death of carving a piece of your business out because of how it relates to the business that you're keeping. I would prep that for at least a year, making it its own company, standalone, showing its own financials before I would go out and try to sell it. One of the things I've seen in the past is just a thought that came to mind is where you have a business where it's effectively two businesses like that where you've started to split stuff off. Does it make sense to even go so far as to have them essentially invoicing each other for where there are shared services? Absolutely. Again, if you're saying, hey, I'm going to sell this piece of the business, it's worth doing everything arm's length, doing everything just like it's a totally unrelated entity. Again, I can't overstate the concern that a buyer is going to have as to what's going to pop out once those two businesses are actually separated. There are going to be thoughts going through the head like, do we have revenue that's dependent on the other company's revenue? If they screw up, our revenue goes down. Do I have costs that are not being allocated properly? My business doesn't have, they're not carrying the software costs because they're carrying it on the other business and the moment they're separated, I'm going to end up with increased costs. There's this black hole for buyers that if it's not split up that way, they're going to significantly lower valuation because there's more risk or at least perceived risk for them. That makes sense. Now that actually spawns another question. Is there a structure that makes the most sense? I mean, corporate versus S Corp versus LLC, there are certain things that you need to be in this structure before you're even thinking about whether it's acquisition or selling a company? For the most part, it doesn't matter, Rob. For the most part, acquirers are going to do what they call an asset purchase, which was really started by the lawyers. But at the end of the day, what technically they do is they come in and buy all your assets, whether it's IP or contracts or whatever, they start up a whole new entity and they take those assets and put them in that new entity that DBAs is the same name as the company that was sold. So for the most part, buyer doesn't care what type of structure you're in. And LLCs or S Corps are all pass-through entities. They're all generally taxed the same. There's some nuances between them. Obviously, C Corps are different. I certainly wouldn't off the cuff recommend anybody via C Corp going into a transaction. So short version of the story is most companies I see, the most preferential organization organizes an LLC tax as an S Corp. That's the best LLC tends to be the best legal organization. S Corp tends to be the best tax. Obviously, everybody's situation is different and they need to analyze that. But I wouldn't go changing anything based on potential sale. That makes sense. And it's just one of those, it's like, you don't think about some of those things you don't think about till you get to that point. You're like, huh, it's because it, you're just doing your business. And then the next thing you notice, I did I, should I arrange this a little differently so that it has a better look or appeal to, whether it's as buying or selling. So I want to thank you for your time. This has been great. I've loved this discussion. We've wandered around a little bit, but I think we've got, there's a lot of information that's come out of this. It's some good general, if you're in a side hustle, if you're starting up your little company and it may not necessarily be that little, but it's maybe you and you alone doing it. So it's staff wise, maybe it's a little bit building that thing up, starting from scratch. And I think some of the, like you mentioned, some of these are things to think about even before you get to that point. So things like having a regular evaluation is once you get going and say, Hey, just spend a little time, spend a little money and have somebody come in, take a look and give you an idea. Cause that may prompt you to say, Oh wow, this is worth more than I thought it was going to be, or this is not worth anything. I want to figure out how I can actually add some value to it. So I want to thank you for your time at that before wrapping it up. What are, cause you've, you guys offer some services, what are some good ways to get ahold of you? If somebody says, Hey, I'd like to explore this a little further where, what's the best way to contact you and to start that conversation? Yeah, absolutely. So I don't know if you can tell, but Rob, this is my passion. So I love, I've gotten to a place where we've been fortunate enough to build a really nice business and we make good money, but there's nothing that I love doing more than getting on the phone with entrepreneurs and help them take the next step. We've got a team full of people that does the same thing. I think the most logical first step for anybody would be to get on the phone and have a 60, 90 minute conversation about their business, about the things that are keeping them up at night, about how, you know, how we might be able to help. I think my folks may kill me for saying this, but you know, I'll send you a link after this to my calendar and, you know, I'll send you some details, but if, you know, for your listeners first, you know, half dozen, 10 of them, if they want to schedule a 90 minute meeting, I'd be happy to sit down with them for free and just go through the business and more specific recommendations. Frankly, out of that, you make a decision, does it make sense to go through a health assessment of the finance side of their business? And if the answer is that, that'd be a project and out of that health assessment, it'll either make sense to do additional projects that'll create value, that the cost benefit makes sense, or it'll be, hey, I'm glad I know that. Let's look at doing another health assessment in 12 months or 24 months, or let's look at doing an evaluation next. So again, I'll send you my contact information, would love to talk to your listeners. Yeah. I actually bring something I didn't ask, what is a typical time frame to do a health, or is there a typical time frame to just do that initial health assessment? Yeah, I mean, there's a lot of factors, obviously, state of books, complexity of business, stage of business, but you know, you should be looking at 30, 60 days. It's always good to have a little bit of an idea going into that. It's like if somebody says, I want to do this and I want to evaluate my company and sell it this weekend, obviously, it's going to be a bit fast, probably not going to happen. So it's getting a time frame around that. So you know how far ahead of the game you need to be in order to be effective at it. So, all right, well, I will respect your time because you've got things to do and you enjoy doing them, but I did enjoy speaking with you. So I want to thank you a lot for your time and have a good day and a good weekend ahead of you. All right. Thank you, Rob. Thank you. And that will wrap it up. I hope that you were spending some time really paying attention. I know from our developer background that we can sometimes sort of tune out some of these kinds of things when we get into sales and marketing and finance and accounting. However, if you are going down that entrepreneurial road, if you're thinking about creating a business, if you want to be more effective for your business, then these are some of the skills that are useful to have. And getting a free time essentially with an expert such as Brent, I find to be very useful. Hopefully, you will do the same. As I mentioned before the episode, there will be a link. He has a free offer that he's going to allow for sort of a first come first serve. Well, not sort of. It's a first come, first serve. There's a limited number of offers, but there's a link that will be out there for specifically for developer podcast listeners, and he will offer a free consultation. And I think it's worthwhile, particularly if you're a business owner, if you're thinking of owning a business, this is something that, hey, free is really good. And yes, it may lead you to something where you're going to spend some money, but it is one of those things. It's key to do that. That is like some of the other areas we've talked about, like security and some other areas, it is money well spent. It is, as they say, the cost of doing business. The cost of this episode is your time, and I appreciate so much that you've spent some time, but we're going to wrap this one up. We will come back. We're going to do some more interviews. We're going to continue changing around a little bit the topics to keep things a little different, a little fresh, but we'll be back next episode with our next interviewee. Until then, go out there and have yourself a great day, a great week, and we will talk to you next. Thank you for listening to Building Better Developers, the Develop-a-Nor podcast. You can subscribe on Apple Podcasts, Stitcher, Amazon, anywhere that you can find podcasts. We are there. And remember, just a little bit of effort every day ends up adding into great momentum and great success. Please check out school.develop-a-nor.com. 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