230. “Financial Infrastructure and Due Diligence” with Jeffrey Glick

Transcript

Dawn Kennedy: 0:03

Welcome to Business Mastery with Dawn your quick under forty five minute dose of expert insights and strategies to make a positive impact on your business and life. Let's get started. Hello and welcome to this episode of the Business Mastery Podcast. Today we're talking about your financial infrastructure and due diligence, and possibly the policies and things that may be missing in your organization that could create some risk. So I have Jeffrey on here to talk to us all about it. Can you tell everyone who you are and who you serve and what we're going to do today?

Jeffrey Glick: 0:40

Sure. Jeff Glick, CPA. I work with start up and emerging businesses, and our goal is to make them more bankable, which means they are ready for the. Typically, it's the first material financial transaction which could be a alone. A merger and acquisition, bringing on an investor's or somebody knocks on the door and wants to buy them.

Dawn Kennedy: 1:10

Amazing. All right, so before we get too far in here, first financial transaction, like you said, your first loan, could be an investor coming on. So the financial infrastructure we're talking about, every business should have, even if they're not in a position of being acquired.

Jeffrey Glick: 1:27

Absolutely. And it has a lot of other benefits to it because now you're making could be critical decisions based on information that is timely, accurate, consistent tracks, key metrics and benchmarks. And your reporting is strategic. It's helping you understand what's going on in your business. If your core competency is in finance and accounting, It's doing something else. You might be missing signs, clues, and unfortunately, omens that you need to prepare for. Right?

Dawn Kennedy: 2:09

All right. So financial infrastructure wise, I know going to be people listening in and they're like, no, we got QuickBooks. It's all automated. We have a bookkeeper reconciles all the I get a PNL every month and I see my accountant twice a year. I think I have what I need. Is that accurate?

Jeffrey Glick: 2:27

For some businesses, yes. For some businesses, it's got them to are, but not where they want to go. So for example, if you're a business and you do lot of projects, and when you ask somebody what is margin and they say fifty percent, and then I go, great. How many are seventy five and how many are five? And they go, I don't know. Okay. Well, that's an issue because you need to know which which accounts are doing great, and you need to make sure you don't lose them. And the ones that are twenty fives, you need to either charge them more or maybe drop them, or maybe you determine that it has the same manager on all of those twenty fives. So maybe you need to spend more time with that person, elevate them. And this goes into labor allocation having control, maybe of materials, maybe having inventory system. So you could allocate it properly and you can determine, well, these are all going to to projects, but we should have more inventory in the warehouse. So maybe somebody is walking out down slowly. So that's just one example of why having really good financial infrastructure helps you and it also helps elevate your valuation as well. And we can talk about that as well.

Dawn Kennedy: 4:04

Definitely. Yeah. I wanted to talk to you about what are the things that make a business more bankable than another business, especially when it comes to that control that you're talking about?

Jeffrey Glick: 4:14

I think so if you're going through due and the due diligence could be through a bank, an investor, a partner, and they start asking the owner of the about what's going on behind the scenes. And they don't know. It could be troublesome because at the end day, people invest in people, not companies. So they want you to know what your margins are. How much do you spend to get a client? How long do your clients stay? What's the value of your client of your sales today? How many of them were acquired three years ago or five years ago or three months ago, which is critical because you have clients that stay and that's franchise value. And that's what we say, is that you need to sell your company and yourself, that you're a good manager, you understand what runs your business and where you are going to start investing this capital that you are trying to raise. Just don't give me money and I'll figure it out. I know where we need to focus on, and I have hard facts and data and numbers to support that.

Dawn Kennedy: 5:42

So when you're saying that people are not just investing in products, they're investing in the founder or the owner or the leadership. Can we look at that a little bit? Because sometimes if you're in certain transactions, they actually are just looking to take over in other transactions, though, they might keep some key personnel on. And for others, they're investing in letting you keep control. So does the does the analysis change based on they plan to do later? Or should we just prepare for this at all stages, no matter what we're looking to do?

Jeffrey Glick: 6:15

It could change what they look for, but at the end of the day, they might want to buy this company for their client list. And how sticky is that colony? And if they're not tracking how sticky it is they don't have reports, it's got it's going to slow down the process. It's good. So maybe they didn't plan on keeping manage, but if they have everything under control and it's working and it's growing and it's efficient, it's effective, they're good managers and they're keeping staff, They might change their mind or they might. They pay a premium instead of paying a on evaluation.

Dawn Kennedy: 6:59

Okay, so having this information could actually increase the overall sales price of the business.

Jeffrey Glick: 7:05

Yes.

Dawn Kennedy: 7:08

You think it also would change the amount you might qualify for a loan.

Jeffrey Glick: 7:12

Right? Yes. Because what happens? A bank will come in and do evaluation on your business. And they might only underwrite a loan for a sort of decent situation. And your evaluation is higher or not But let's say that it's not discounted versus the industry comes or that they'll say, you know, I'm looking at your cash flow and something doesn't make sense. So we'll discount the cash flow and then we'll do a EBITDA adjustment. And then it will come up with a valuation. So the more they feel at ease, the more they'll focus on the value of your business. And that could be your intellectual property, your sales, good name in the industry. Or they might say, you know what? We love this industry. We're looking for a company that can be our number one acquisition. And everybody else we acquire, we're going to roll into them. So they are the nucleus of our business now. And that ends value as well.

Dawn Kennedy: 8:26

Right. So the the pricing is definitely affected. Can we talk through some of the policies and reports and things that you see in due diligence that maybe were accurately keeping or not keeping soon enough inside our businesses?

Jeffrey Glick: 8:43

I look at it a couple of things. First President at this time. As I mentioned before, you're getting thirty days after the month, forty five days after the month. That's a problem because you could have a ticking time bomb and you don't know it. If you're not tracking important metrics in that industry, that's a problem. Are you keeping up on standards in your And that could be the way you do your accounting. It could be your contracts. There's a lot that goes into due diligence. And the better in a business is managed on all fronts, the less people are going to be taking discounts. So it can be let's take a look at your contracts. And they go, we don't have employment contracts. Well that's an issue because could be an issue because now the people could leave and you have tied them down, or it's just hard to make that transition. And if you have a bumpy transition, your business won't be worth as much. And you really have to think about this one to two to three years in advance. There is time, but you have to be proactive and not wait to someone knocks on your door, and now you have to shuffle and you make crazy adjustments and they ask you, oh, can you do a percentage of completion calculation? And you don't keep track of that stuff, right? There's a lot to it in that. And when you make these changes that they're not expenses, they're investments. It's like buying a new tractor trailer that's every month. If you invest in your infrastructure, that's going to be money in the long run because you can sell it for more and in the short term, you can manage your business better.

Dawn Kennedy: 10:50

All right. So beyond employment contracts, let's say don't have contracts with our employees. Those are something they would be looking What about some of the I'm going to call them cash management policies that you think maybe we don't keep enough of. Like, for example, I just anecdotally from one of my clients a few years ago, they did not have a written policy about the minimum and maximum people could write checks for or who had authorization or when it needed signatures, those types of things. I think that's something that just we evolve as business owners or in the beginning, because we're not writing checks at that amount. We don't ever think about needing a second or not separating, maybe at some point bookkeeping from the person paying the bills. So what sorts of things do you see in cash flow cash management policies that a lot of missing, that could be important.

Jeffrey Glick: 11:48

It's exactly that. So if you're in a non compliant industry, you so like if you're an investment adviser or money manager and registered with the SEC. Yeah, there's one standard and you have to be and you have to do that they want and you have to invest in that infrastructure they want. If you're in just a normal business, you don't have to do all that stuff. However, I'm an owner and somebody writing checks out of my account, it makes sense that they want how much you trust them. They can't write a check without my signature approving it. And if it's over a certain amount, they need two people approving. People don't write a lot of checks anymore, it's. So you tell the bank over five thousand dollars or whatever we need to approvals, right? And if it's over a certain amount, then the owner has to approve or the present. You hold those people accountable. And then what you should be doing is on a monthly, weekly basis, depending upon how that happens, take a look, go back, have some level of compliance or when every maybe that person and maybe the president or some senior management person gets a report of the large transactions coming out of the bank and they say, oh, I never saw that or that. And it goes both ways. One, it keeps people on their toes. Also, it teaches senior management what's going on because I'm in the weeds a little and they can have a relationship besides just getting the present now. And they can call if they want to, a bookkeeper or something. Watch this, watch that, and then.

Dawn Kennedy: 13:55

All right, so where else do we not have? Or let's ask it this way. Where have you seen these types of things that businesses should have a fact due diligence and maybe something not close or they close at a different amount or people be rejected from the banks? What do you see missing that the majority of small and medium sized business owners don't necessarily know, they know they need or maybe don't pay enough attention to.

Jeffrey Glick: 14:25

Hey, what a lot of times is liability That's a big one. Are they should promptly for workman's comp. I was in a mission Basic liability on your product based on what the product is. Because if I'm buying a business, I have this thing called tail risk because I'm not just responsibly going forward, I'm responsible for what's happened in the past. So are they focusing on that type of risk?

Dawn Kennedy: 15:01

Yeah, that's a great point. I don't think we talk much about tail risk here. Can you explain what that is when somebody purchases your company what is tail risk. And as an attorney tail insurance is a big thing of E and O. But I don't think we talk about it enough in small business what it means to have tail risk.

Jeffrey Glick: 15:21

Tail risk basically is I sell my business and typically, depending upon I'm not an attorney. So that's your limitations. Somebody might have three to seven years to sue you. So now I switch ownership. They get their own insurance. But what about those three years of somebody themselves or an employee and they have three years to sue us? Do you have insurance against that? You typically want to cancel insurance. They've done they don't look back. Right. So a tale insurance is basically you're taking a another insurance policy out to insure you for past possible insurance issues. And that is typically part of a closing where the purchasers say, okay, either you pay it or we're going to take it off the price. Okay. And this is the thing is that they, you want to be able to package a closing for them. So this is okay. And they have this, they have this, they have that, they have that. Okay. Now we can concentrate on the important things like their client list, like their intellectual property. Are they doing maintenance properly on their manufacturing site? Stuff like that. That's the important things. But all these other things, it just shows that it might not be that there's a big issue with talent insurance, but now you're thinking, what else have they thought about? And what are we walking into? And if it's not a big check, their writing, they might not go that deep into due diligence because it's it's expensive. You get quality of earnings, you hire a third party to do by side due diligence. That all adds up. But in your initial due diligence, you can get a feel for this. And as a buyer, you should have a checklist of all these things. Show me what you have put it on in the data room. And that's why the data room is so important. Also because it shows a buy that you have your act together, that you're ready for this and you have and you know, the answers to the questions before they're asked.

Dawn Kennedy: 17:56

And they're saying one to three years before making a large transaction like this, you should engage to make sure that you're ready to package up and either sell or in the case of a loan, let's say that you're keeping the business. We I think we all know as business owners, we shouldn't really be going to the bank because we're in distress. Right. It's really the the best time to use any sort of leverage would be in expansion. Cash flow is good. All those things. But what would the bank maybe be looking for as well? Because I know generally they're going to ask the last what, three years of tax returns are going to ask for a P and L, they're going to ask for a balance sheet on assets. Um, but what else could we be providing.

Jeffrey Glick: 18:44

That they will ask for. They have a list basically also. Okay. And they ask for. Okay. Let's talk about your property, plant and equipment. Who owns the property? Is it the business. Is it leased or is it the family that founded And they have an intercompany exchange? How's that structured? Are you protected? So if the family, let's say, sells the cells, the land. Now to the third party. Who's your landlord? Is your is your record skyrocketed in three years if they sell. And so there's just a lot that you have to go through and figure out. Another thing is, let's say you're buying materials overseas and you're buying it in foreign currency. Are you hedging that risk? Because if you know, every year you're spending three million dollars in France on something. Are you hedging your risk with euros? That, I would think, is a good sign that at you're thinking about and you might not do it, but at least you've gone through the process and you have where I spoke to this Wall Street firm, I talked to this insult and came up with a plan that once our forward risk reaches a certain level, then we will buy hedges against that only maybe to that extent. Just. It's expensive. So how are you thinking about this? And I'm looking for money, as you said, capital. You say there are things I can't do to protect myself. I just don't have the capital. With this, I'm going to be better protected. I'm going to be able to get faster equipment and we could grow. So that when they say to you in your pitch deck, show me your sources and uses, you have to know what you're going to use that money for and how long it will last and long it will it be till you go for another ring if you need to do it? So that's what I've been looking for. There's a lot that goes into it. And if you have the right people around you, either your staff or your accounting firm, your investment banker, That's very helpful.

Dawn Kennedy: 21:32

Yeah. They're not just looking at an ability to repay, I think is what I want to make sure that we're very clear about is this this due diligence isn't just whether or not you can make a loan payment.

Jeffrey Glick: 21:43

Correct on the bank, but on the bank side, it a loan page. On the investor side, they want to return either every every month or every six months they get a or at the end when it's sold. And they also want to know what do you plan on doing? So you have to go to the right investors. A family office probably isn't that concerned about flipping every five years. Private equity fund is concerned because they only hold their investments for three to five years, and then they flip them poem, and then they get a distribution, and then they get their fifteen twenty percent of profits. And that's the caravan. That's what they're interested in. So you have to understand all these variables. And we're going to get involved with and pick the right partners.

Dawn Kennedy: 22:45

Yeah I think that's important. Picking the right partners. And let me ask, because this is what you do and you are involved in the due diligence. Have you ever taken on somebody that got about halfway through or a third of the way through and realized it was the wrong things? We're talking about the expense of going due diligence, which is expensive, but typically, do you make the right match first?

Jeffrey Glick: 23:10

You have to. The problem is, as you said, due diligence is expensive. And if you're a fund, you do not want to spend a lot of your LP's money on broken deal fees, because that's just a loss, right? And they want to know what percentage of what they want to know is what's your investment process. At what point are you spending money? And that's what they care about. It's gone through an initial review. Then they go to the investment committee who says, okay, let's do due diligence and pass on that. And then because if you have a lot of broker dealer fees, you can kill your fund return because that's just loss.

Dawn Kennedy: 24:03

Yeah. Let's talk about broken deal fees because I don't think that's something that we really talk about that much. Just in the average managing of small and medium sized businesses is this is almost like when you put a deposit into escrow on a house and you back out of the deal, you lose your deposit is basically my understanding. Is that pretty accurate It.

Jeffrey Glick: 24:25

It depends because you can negotiate a a out. So if we say what we want to invest in your business and we're spending the money. However, if there's problems and you told us something incorrect. Now you have to pay us and we would put that money. So we might tell them, you have to put that money in escrow with a custodian.

Dawn Kennedy: 24:55

Right? Yeah. It's either side. Yeah. It protects both sides. Right. So if you guys get in there and you say, we thought this was something else, or maybe you get in there and the market is changing or you find something you can get out. But if there is, and I'm just going to call misrepresentation because that's what it is, then yeah, obviously you're going to have to pay for that misrepresentation. And the reality is if you enter into a due diligence agreement with a lot of businesses. You've locked out any other person from looking at your business during that due diligence phase. So both of you guys are almost engaged. I guess it's.

Jeffrey Glick: 25:35

Fine. I mean, sometimes you could ask for an exclusive. So if you sign an understanding agreement MOU, and then you say, okay, I need sixty days to do my due diligence and I have an exclusive. You can't show this to anybody else, right? Some people say, too bad, I'm going to show it until you pay me. And then a lot of people don't want to get into a bidding war. Right?

Dawn Kennedy: 26:10

But everything is negotiable, right? Until it isn't negotiable anymore. You can negotiate just about anything you want.

Jeffrey Glick: 26:16

And a lot of sellers or people who are for investors, they don't want to use it. You start negotiating at the closing Great. Right now. We're almost there. We're almost there. Now we have to give up another ten percent because of the way they did. So that's why you really have to know who's on the other side. Are they decent partners? What's their name worth in the business? Reputationally. That's what you really have to worry about. And you might not know. And that's why hopefully your attorney, your accountant, your banker is not going to bring you bad people.

Dawn Kennedy: 27:06

Right? Right. Yeah. Let's talk a little bit about some of the things with the due diligence. It sounds like it's not a bad idea that if you've been in business past a certain number of years, that just having an audit to find out if you are missing something that would help you operate business better. You know, do people do due diligence audits without having an eye towards loans or sales?

Jeffrey Glick: 27:31

Absolutely. So what people will do from time to time, well, it's not cheap having sell side due diligence. Basically, a lot of times you'll hire an outside firm to do sell side due diligence. So they'll tell you what's wrong before you go market. And then you can either fix it if you have the funds or you just stated in your investment deck. We've gone through it. We know we have these issues, and we're going to allocate part of your investment to fix these.

Dawn Kennedy: 28:10

That's important.

Jeffrey Glick: 28:12

That's important. Know where the problems are before they surface and even do it like a think they'll do like a gap analysis where it's not really intense. They'll go through stuff and they'll figure out what's missing. And that's one of the nice things on a well managed business. They know their product, right? But it's also due diligence is a verification. Then you also could do sell side quality of earnings. So there's a lot you can do to prepare yourself for a transaction. And it's a lot of times it's an investment. It's not a expense.

Dawn Kennedy: 28:59

Right. Well what's interesting is even if you don't your eye on an instant investment, having this done to company every so many years to spot the problems may not be a bad idea. Since the the day in, day out operating of a company, there may be something in a not highly regulated field like we were talking about earlier, that could become what would call more of a quiet risk. Maybe you're not as I'm not going to say paying attention because I think that's we just have so many things pulling us away. But if you are realizing there's another metric that now your industry is tracking and you have not been tracking it, this would be maybe a way to discover some of the information gaps that you could even use to become a better company.

Jeffrey Glick: 29:49

Absolutely. If you're a, I use this example a where you're a family business. Second generation, you know, grandma, grandpa, they founded the business. They did really well. Brother and sister, they take it over. They killed it. They have a nice lifestyle, nice house. All medications. All the kids went to private school or prep school, yoga and private colleges. They all have cars. Now the kids are coming in and they want to say, hey, now let's get to say a unicorn business. And they say, okay, so so we need more financial infrastructure.

Dawn Kennedy: 30:33

Yeah.

Jeffrey Glick: 30:34

But their bookkeeper slash account slash controller slash.

Dawn Kennedy: 30:41

Yes.

Jeffrey Glick: 30:41

Whoa. Is their mother's cousin. She's been here for twenty five years. She's very good. And but she hasn't risen the financial infrastructure to where it should be. But she has something like nobody else has. She has knowledge of what's going on. So you have to treat her nicely, kindly. You just can't offer. But that's something where. You're being pushed to do this, you don't have a choice because now there's not two families to feed. Now there's another four families to feed. You know those six cousins, maybe four, want to go away and two don't. But the two that don't want to get paid. Now you have to figure that out. And so that's a whole nother. And that's why there's a whole industry of people who cancelled family businesses. There's a lot going on that people have no about. Right.

Dawn Kennedy: 31:45

Well, I would say the majority of people listening in would be founder, owner and leaders who have been in family businesses and maybe started their own. I think it is that entrepreneurial threat is not something that wouldn't necessarily want to continue, necessarily want to continue with a lot of our listeners. I think it's important. So you made a very important statement, though, about the CFO, the controller, the bookkeeper, and the accountant being one person or maybe two people. And how often do you see that?

Jeffrey Glick: 32:22

Companies that really don't do accounting, they just watching cash accounts receivable or accounts payable. Yeah. Key metrics. And are we going to make payroll the next week? If not, then the owners have and they have plenty of money. They have to write a check to lend until they a big cash receivable or stuff like that. Yeah. I mean, it happens a lot because people are saying I want to spend money on intellectual property, new products, sales, marketing. Let's go to this show, that show, let's get sales. Let's just get our revenues as high as And then I'm thinking about sometimes, oh, what's our gross margin? How can we be more efficient? Like who's managing our vendors? Who's doing that? So we know we're getting the best stuff possible at the right price. So and then at the end of the day, they say, well, I want to spend another twenty five, thirty, forty, thousand dollars and bring in another accountant who can help us because that accountant understands it's an whiz and they could really help us, or they know AI, and that's the way it works.

Dawn Kennedy: 33:48

I don't know if that's a bad word. I have seen some grumblings, though, about how AI is building some of the financial models that people would take weeks to build. Yeah. Previously, so I have seen some in the M&A space. I have seen some articles and things about how much faster, but then they still need to be checked by a human right, because Or.

Jeffrey Glick: 34:10

If you have a a young adult putting at the end her. You still need to be with your. Anything. Yeah. And there's things that people make AI makes mistakes, but you can get it out quicker. Right. But it has to be a balance there. Like I said, there's how are you going to improve your entire company? Because people want a company. If they're not a company, they'll just buy your AI or they'll license, although it is buying certain assets. Yeah. And then they buy an asset. Then there's no franchise tag.

Dawn Kennedy: 34:51

They don't brand goes away.

Jeffrey Glick: 34:53

They don't care. And the Kinsey Institute came out with a report recently that there will be six million businesses worth ten trillion were founded or run by baby boomers. And as they age out, a lot of businesses coming on the market and some will be sold and some will disclose.

Dawn Kennedy: 35:16

Right.

Jeffrey Glick: 35:16

If you ran a business for twenty five, thirty years, you will want to have the best value possible. And a lot of companies, a lot of investors or buyers, they don't want to waste their time. Yeah. So that's another thing to think about. Yeah.

Dawn Kennedy: 35:35

And that's a very important topic. Absolutely. What are we doing later. But the idea of you running your business, your eight to ten to twelve to fifteen years old, and we've always gotten what we thought we needed to make decisions. But now the market's gotten a little less and we've had some people ask to invest. So yeah, this is an important conversation we all should be doing better. I think if we don't have our financial infrastructure in place, it's probably something we don't about very often. Like we don't think about our operating agreements and our founding documents. Very often, you know, a year eight, like we did year one, think it's just the, the, the cadence of You're always moving forward. I think sometimes it's a great reminder to stop and make sure you have what you need for the next phase.

Jeffrey Glick: 36:24

I give this exam another example. Sometimes you have a house and you're on a system, and now you hook up to sewer. You just closed the fifteen, twenty thousand dollars or whatever it costs, right? You get no joy out of it. It's but you have to do it because a, you need to have the infrastructure and you might get and you might get the money out of it in five years. But when you sell it that you hope not to sewer and town water.

Dawn Kennedy: 36:59

So yeah, that's a great that's actually a great example because it is true. The way that we start and the way we end up are evolving, and they're completely different. Where can people find you? And I know you do offer some of the due diligence services for businesses over a certain size. So where can they find you, learn more about you and maybe track you on social?

Jeffrey Glick: 37:25

Social on fairly limited. I'm on LinkedIn. I'm a fairly active poster and post three or times a week. Some do better than others. I've got a couple over one hundred thousand impressions. Some I get three hundred and fifty expressions. Wow. It goes up and down on the on the website. Oh, CFO dot com. They can find me there. And then those are two of the best ways to find me.

Dawn Kennedy: 37:54

All right. Perfect. So we're going to put that down inside the show notes. We're going to link it. So they could just visit it from there and find you. And again thank you so much for having this conversation with me, because again, I don't know that we don't know what's missing. We have gaps we don't know about. And this is critically important to to address those before you're getting ready, like you said, to make your big financial transaction. So thank you so much for joining me today.

Jeffrey Glick: 38:22

Thanks, Dawn I really appreciate it.

Dawn Kennedy: 38:24

All right. I'll talk to you all next time on the next of the Business Mastery Podcast. Take care. Thank you so much for listening to this episode of the Business Mastery Podcast. If you want to learn more about me, you can go Don k Kennedy dot com and you can now check us out on YouTube well as, of course, any of your favorite platforms that podcasts. Take care.