Follow the Leaders
You are the CEO of a growing business. Do you need to:
You may have thought about hiring a full-time CFO but held off given cost. Or perhaps you were concerned that you do not have enough work to keep a full-time CFO challenged. There is an alternative: You can engage an experienced CFO on a part-time or project basis.
By hiring a fractional CFO, you’re instantly gaining access to all the knowledge, experience and lessons learned by this CFO over a career. All at a significant cost savings to you.
Jay Nathanson, COO of Image Group, found it to be “a very, efficient way to use expertise.” Adding, “It really became a great opportunity for me to be able to grow the business without making the investments of full-time people.”
Building on my 35 years of experience, including serving as a full-time CFO for six companies and as a fractional CFO for others, I share several scenarios which describe situations where a fractional CFO might be able to help you.
Scenario #1: You Need to Spend More Time in Areas Where You Add the Most Value
If you’re spending more time in planning and forecasting, contract negotiations and interactions with investors, and less time with customers, in strategy development and in other areas where you excel, it’s time to engage a seasoned CFO. This executive will free you up, enabling you to add greater value to the business.
Scenario #2: You Need to Maximize Cash
You understand that cash is king. You need the ability to forecast future performance, staying on top of cash forecasts, debt covenants, receivables and payables. You also need creativity in the use of bank and other kinds of debt. An experienced CFO can help you maximize cash at the lowest cost.
Scenario #3: You Need an Operational Finance Perspective
You are getting accurate historical financial information; however, you are not getting meaningful analysis and insights from such information to drive your business forward. The right CFO will bring significant operational finance experience to the business, enabling you to fully understand historical performance, get the right metrics in place and more.
Scenario #4: You Need to Update Your Strategic Plan
As your business grows, there are many places where you can invest limited resources: sales and marketing, product development, customer success and more. To get the best return requires an understanding of customer issues, customer and product profitability, the competitive landscape and more. An experienced CFO can link financials and strategy, helping develop a plan which will increase your odds of success.
Scenario #5: You Need Capital to Grow Your Business
To execute your plan, you need to invest more in sales and marketing, customer success and new product development. This requires additional capital. Engaging a CFO skilled in raising capital will help you negotiate the best deal, minimizing dilution.
Scenario #6: You Need a Trusted Advisor
As the business grows, you are encountering a range of issues and questions, from personnel (e.g., what incentive program is right?) to tax (e.g., do I have sales or use tax exposure?). You need someone on your team with significant experience across many businesses and circumstances, someone who understands and has been around different C-Suite roles. Engaging an experienced CFO will help you get to the right answer quickly.
Scenario #7: You Need an Exit Strategy
Positioning your business for sale is not cut and dry. If you’re considering a sale in the next few years, now is the time to prepare. To get the most value, you need the advice of a CFO skilled in buying and selling companies.
About the Author
Bobby Jenkins, Managing Director, Fahrenheit Advisors (Charlottesville), is an accomplished executive with 35 years’ experience and a demonstrated track record in diverse businesses and circumstances. Working with public and private companies, large and small, he has played a key role in increasing equity value for stakeholders. His experience and skills position him well now to add value to Fahrenheit clients, particularly in engagements related to business planning, capital raises, performance management and restructuring.
Whenever a member of our team wraps a speaking engagement, after the public Q&A session, the CEO of a company invariably pulls us aside and in a half-whisper asks, “How do I know what my company’s worth?” This is usually hotly followed by, “What can I do to increase the value? When is the best time to sell, and how long will I stay on after I sell?”
There are entire books devoted to answering these questions, but let’s see what we can do in a few paragraphs. Let’s start with this:
WHAT’S MY COMPANY WORTH?
All merger & acquisition (“M&A”) transactions are valued on two fundamentals – the return a potential investment can yield and the perceived risk of getting that return. It doesn’t need to be more complex than that. Simply put, M&A makes sense to an acquirer when the cost (and risks) of securing additional revenue outweighs the cost of building the business organically.
Buyers initially focus on the potential earnings from an acquisition target. So, what exactly are earnings? The most common measure is EBITDA – Earnings Before Interest, Taxes, Depreciation, and Amortization. Because a buyer may have a different tax rate and a different capital structure, they exclude the target’s unique tax rate and interest payments. Similarly, depreciation and amortization are non-cash expenses, and companies may have varying accounting policies regarding how items are depreciated or amortized, so buyers typically look at earnings before these non-cash expenses. Thus, EBITDA is an attempt to measure cash flow from the business on an apples-to-apples basis.
In order to calculate EBITDA, start with net income before corporate taxes, add back interest expense, depreciation, and amortization, if any, to arrive at EBITDA. After all this work, this is a great place to stop, take a break, and get a cup of coffee.
ADJUSTING YOUR EBITDA
Many CEOs of privately held companies run expenses through the business that would not necessarily be incurred by a new buyer. These might include family members on the payroll, the one-time legal expense for an issue the company had last year, or the 30-foot Wellcraft boat the company uses on weekends as a “research vessel”. There are many others, and it takes a thorough review of your financials to prune out these unusual or non-operating expenses.
Because of these, we want to calculate “Adjusted EBITDA”. Starting with your financial statement EBITDA, add these extraneous expenses back. Be prepared to justify these addbacks because buyers will always be suspect that the expense was really necessary to generate cashflow.
The next part appears relatively simple, but in reality, has complex math behind it. Look at the table below and multiply your Adjusted EBITDA by the respective EBITDA multiple given your industry and EBITDA size. For example, if you own a healthcare company with $1 million in EBITDA, multiply it by 5.5x and the initial valuation is $5.5 million. This is BEFORE the multiple is handicapped for perceived risks.
But what is this magical table? It is a summary of implied valuation multiples based on a large survey of actual sale transactions (“comps”), in this case compiled by Pepperdine University and published in the spring of 2019. The business school conducts a survey each year of investment banks, CPAs, and various intermediaries involved in the sale of companies.
A complete or formal valuation will include other analysis and computations, but this provides a thumbnail value range for your company. Comparing changes over multiple years also reveals some trends. Higher growth industries such as information technology and biotech have higher multiples while low growth industries such as construction have lower multiples. In general, higher growth gets a higher valuation. Since buyers are paying for future cash flow and growth results in higher profits, it makes sense they would pay more.
Notice how the values increase from the first column to the third column, In general, the larger the company, the higher the valuation. Larger companies tend to have more “quality” earnings, such as: complete management teams, better accounting systems, and more thorough business processes. In other words, there is less perceived risk that some unforeseen negative event will threaten the cashflow. Similarly, a smaller company may be dependent on one or two key employees or customers, and if something happens to one of them, earnings will likely suffer.
In addition to projecting earnings, buyers assess the risks to the earning and those risks decrease the valuation. Some of these risks are:
CEOs need to continually work to reduce the risks in their companies. This will, in turn, preserve if not improve the multiple applied to the Adjusted EBITDA number.
When it’s distilled down to its essence, a company’s worth is impacted by any decisions that boost its EBITDA or reduces perceived risk to the buyer; all within the purview of the CEO and not really so mysterious.
Patrick Morin is currently a Partner at Transact Capital. He joined the firm as Managing Director in 2012. Patrick brings with him a wealth of experience in capital raising, deal-making, strategic advisory to CEOs, marketing and revenue generation, along with investment banking and business ownership. As a prominent speaker to industry groups and business, Patrick is well connected to many well-known business leaders throughout the U.S.
Today in business, there are more acronyms, legal agencies, and regulatory requirements than ever before. If you employ people in your business, you must understand and comply with these requirements, which can be daunting. The number of people on your payroll determine the magnitude of your time involved and, ultimately, the work expended to comply with the requirements. The full life cycle of an employee from recruiting strategies through terminations and all actions in between present opportunities for legal issues. The key is creating best practice processes, policies, and a workplace culture that protects your company and manages risk.
Where are we now? Every February the President’s administration releases its proposed fiscal year budget for the upcoming year outlining the White House’s priorities for the year ahead. Many of the items for FY 2019 contain a number of workplace-related proposals, specifically changes to labor, healthcare, and immigration. Below are the main topics to consider when assessing strategic decisions for your business and HR policy. While some of these areas are still in the proposal stage, they will be items to keep an eye on going forward.
Paid Parental Leave establishes a federal and/or state paid parental leave program. Family Medical Leave Act (FMLA) was passed and allows for unpaid leave for up to 12 weeks if your organization meets the qualifications. A new regulatory proposal suggest that paid parental leave might be found and funded within the unemployment insurance program. These provisions, if passed, would begin in 2021. Another option is a voluntary Social Security (SS) benefit program that would provide pay during parental leave as an offset to future SS benefits for employees who wish to take six weeks (2019 proposal) of paid leave for mothers, fathers and adoptive parents to stay home to recover from childbirth or bond with their children. This federal legislation did not pass for this year but many states and companies have implemented a similar policy as a way to address retention.
Employees who work for the State of Virginia are now eligible for paid parental leave per the Governor’s Executive Order signed in 2018. The new benefits, which took effect last summer, provide eight weeks of leave at full pay to mothers and fathers alike. Workers who become parents through adoption or foster placement are also eligible.
DOL and Overtime
Held over from 2016, and still ongoing, are revisions to the Fair Labor Standards Act (FLSA) and overtime regulations. These regulations affect almost every employer and are paramount in the minds of employees in non-exempt status roles who are eligible for overtime compensation. In May 2019, the DOL has proposed revisions to allow employer specific policies and practices that will drive employee engagement, retain the current duties test, and adjust the nationwide salary level (using the same methodology used in previous rulemaking). The Department of Labor has proposed an increase in the salary-level threshold for white-collar exemptions by $11,648 (from $23,660 to $35,308 per year). If finalized, the new overtime rule would result in the reclassification by employers of more than a million currently exempt workers as nonexempt and an increase in pay for others above the new threshold. The proposal does not call for automatic annual adjustments to the salary threshold.
As an organization, consider the reclassification exercise as a way to review job duties, schedules, staffing levels, and salaries. This could have a profound impact on payroll and budgets by making more employees in the workforce eligible for overtime pay when converted from exempt to non-exempt. Above all, ensure that your approach is consistent across the organization.
The Second Chance Act (in the original budget proposal) supports individuals exiting prison to transition to community life and long-term employment through mentoring, job training, and other initiatives. Part of this effort includes apprentice programs at the state level to enable successful outreach strategies, partnerships, economic development strategies, and fuller integration into society. The First Step Act (legislation passed by Congress in December 2018) gives judges more discretion in sentencing offenders for nonviolent crimes and gives inmates credits for in-prison job training and education so they can earn early release.
Affordable Care Act (ACA) proposals have contained funding for a two-year cost sharing reduction in subsidies. This will impact the individual market and may shift significant costs to employers and other private sector payers as well as the federal government.
Prescription Drug Costs
The Department of Health and Human Services (HHS) has published a proposed rule to lower the cost of prescription drug prices by encouraging drug manufacturers to pass their rebates directly to consumers (by-passing the pharmacy benefit managers). This proposal targets Medicare plans and other government health plans but, over time, will impact employer sponsored group health plans. If approved, the effective date is January 2020. In October 2018, President Trump signed into law the Patient Right To Know Drug Prices Act which allows pharmacists to discuss drug pricing with patients. Pharmacists may now educate consumers regarding their medication, pricing, and alternative cost-efficient options.
Association Health Plans and “repeal-replace” were debated throughout this past year, a lot still remains to be discussed and debated in the health insurance arena.
U.S. Immigration and Customs Enforcement (ICE) have significantly increased the number of I-9 audits this past year due to new federal initiatives. It is expected that I-9 audits will continue to be a significant hot button for ICE in 2020. Small to mid-sized employers are especially vulnerable and are easy targets for fines. It is important to know: 1) How to complete the employer portion of the I-9 form, 2) What documents are acceptable, and 3) How to interpret those including expired documents. Ensure all I-9 files are kept separately from other employee files; they require ongoing maintenance and compliance.
Over recent years, there has been a push for a nationwide mandatory process using E-Verify, the government’s electronic employment eligibility verification system for all employers. The same proposed funding includes staffing for more Immigration and Customs Enforcement (ICE) officers and additional worksite investigators. Much of the funding for these initiatives are a result of employer I-9 audits and associated fines.
About the Author
Beth Williams is the Director of Human Resources at Warren Whitney. She has worked in human resource management for more than 25 years with experience that spans many diverse industries, including accounting, energy, financial services and banking, legal services, pharmaceuticals, IT, and non-profit.
As a banker, we hear it a lot. As a borrower, you might have said it before. “My interest rate is so high. Can’t you come down on that rate a bit?” It seems like a fair question, especially given the current competitive banking environment. It always seems like banks are trying to attract your business but at the highest interest rate possible. As bankers, we do understand your concerns, especially when it seems like another bank down the road will offer you something different. But in the bigger picture, is a bank’s cost of capital really THAT high? That answer will most likely depend on the type of financing you are requesting based on the risk profile of your business.
While banks are providers of capital, they are usually the lowest risk provider in the market. For a bank, an investment is the loan that is being extended while the risk is the business’s ability to repay that debt. Just like most other investments, the higher the risk (i.e. the greater the concern for repayment of debt), the higher the return (the interest rate that will be charged).
Let’s assume you are in the process of starting a business. According to data provided by the U.S. Bureau of Labor Statistics, roughly 20% of small businesses fail within their first year while 50% fail by year five. Approximately 35% remain in operations after ten years. You have a business plan and you’ve identified human capital that will move the business forward, but you haven’t quite gotten off the ground. There is a lot of excitement and prospects for taking your idea to market. You need some form of capital, outside of what you can provide via your own personal equity, to handle projected expenses.
In the seed and startup phases, businesses often experience minimal revenues, net losses, and cash flow and working capital deficits. It is challenging for a bank to be comfortable with a new company’s ability to repay debt due to these factors and the overall statistics mentioned above. Because of this, businesses may be required to find capital sources through such things as crowd funding, angel investors, venture capital funds, and small business administration loans. Businesses that have utilized these sources of capital will tell you that this type of financing can include significant interest rates, the potential for loss of equity, and noted reporting requirements. Though needed to fund the risky startup phase, the costs are very high. The return, or the cost of that capital, will match the risk whether it is from outside financing or bank debt.
Great news! Your business made it through the startup phase and is now growing. Revenues are accelerating, net income is being realized, cash flow coverage is strengthening, but working capital needs are challenged. Your debt carrying costs continue to strain cash flow and make it harder for you to fund your business. The startup financing was vitally important, but it might be the perfect time to speak with a commercial banker about replacing your existing, costly third-party debt. You have proven that the market can and wants to absorb your products or services and there is positive cash flow. You’re now less risky because you have shown the ability to repay financing, but there is still noted risk as operating expenses fluctuate and are often unexpected as you grow. Though reduced, risk and limited positive operating results will often result in higher priced bank financing that will still reduce your overall interest expense related to expensive outside startup financing.
Finally, you’ve made it through the growth phase, and you are an established or mature business. Revenue growth is predictable while your profitability is strong and stable. Cash flows are adequate and your leverage is moderate because of your profitability. Equity in your business is strong and allows you to “weather the storm” that will inevitably come when economic conditions deteriorate. In these phases, you are most likely a great candidate for bank financing as a capital source and you should see a much lower interest burden due to your track record. In fact, you can probably even call the shots on your interest rate as every bank in town is clamoring for you. It took a while, lots of hard work, and varying capital sources, but your company has performed well. Your risk to the bank is low, and so is their return.
The truth is that banks are risk averse compared to other capital sources. Losses incurred by a bank lead to reduced capital levels and the ability to lend, and financial institutions have a fiduciary responsibility to their customers, shareholders, community, and Federal Examiners to be well capitalized. This leads stringent analysis in the underwriting phase to ensure that businesses have shown the ability to perform in a way that enables debt to be repaid. As the risk profile of your company lessens, so should your ability to find capital sources with reduced costs.
If you haven’t already done so, look for a commercial banker that will take time to discuss these areas with you, learn about your business, explore capital opportunities, and ensure that your interest rate is appropriate. Responsible bankers may also provide you with guidance around capital sources if they feel that bank financing is not available at that time. Most importantly, a strong and trusted banking relationship with open communication can provide an avenue for the bank to fully understand your business leading to financing opportunities in various company stages at lower interest rates.
Matt Paciocco is a Senior Vice President, Commercial Banker with Virginia Commonwealth Bank. Matt is passionate about working in a community bank that enables him to build strong relationships with his business customers and the surrounding communities. Matt has spent the last 15 years specializing in commercial banking and has positioned himself as a leading community banker in Richmond.
Editor’s note: Image and content provided by VCB. VCB is a Sponsor of VA Council of CEOs.
Public relations today is about more than being quoted in the paper or online. PR today is about driving traffic, sales and business. What used to be newsworthy – anniversaries, new buildings, new hires – isn’t as newsworthy anymore. And gone are the days of relying on your favorite newspaper reporter to tell your story to the masses. Today’s savvy business owner is pushing out stories directly to their customers and prospects, bypassing traditional media outlets all together.
“In the good old days, when you thought about public relations, you thought about media relations and telling your story through the media,” says Jon Newman, CEO of The Hodges Partnership. “The media was a lot bigger, more robust then. We gauged success by how many placements we could get in newspapers.” Today, he says, newspapers are shutting down and TV news coverage is becoming even more niche. Technology and social media have changed the game.
Jon has been in the media relations industry for more than 25 years, and he and his colleague Megan Irvin recently shared their PR knowledge at a VACEOs Lunch & Learn event in Charlottesville, Virginia. We learned that we currently live in a time where content is king, but it’s the social-savvy storyteller who really rules the PR kingdom.
Here’s where to begin.
To become a good storyteller, you need to know your audience. Spend some time internally with your team and figure out who your audience is, what they like and where they live. You may have three or four different audiences. (Jon and his team like to create marketing personas for each customer type to really get into the mindset of each segment.)
Once you know who you want to speak to, use that information to craft your key message. Important: Keep in mind that it’s not about you. In other words …
Don’t create stories or posts about yourself. Create content based on what your customer wants to hear. Jon and Megan suggest conducting informal focus groups, or informally interviewing customers or friends, to learn what to communicate. Ask them, “If you were a potential customer of ours, what are the types of things you’d want to hear from us?”
Know what topics and content your customers want to hear more about, but also hold tight and true to your brand.
“Know the key messages that you want to get across: ‘No collusion, no obstruction,’” says Newman. “What are your versions of that? What are the things you want to say? What are the three to five things you want to say over and over and over again? And if you’re in a service-oriented business, please don’t say that your customer service is better than anybody else’s, because everybody says that. Spend some time and really figure out what makes you different, what you’re going to sell.”
You know what you want to say. Now set specific goals for your content and make sure your internal team is on board.
In general, there are three levels of content:
New to the PR game? Start with creating content that builds brand awareness.
“The first level is about getting people to know your company and driving them to your website,” says Newman. “The second level – lead generation – is the world where you’re driving [prospects] to your website and you’re driving them to an offer, like a white paper or report, in exchange for their name, their title, their company and their email address.”
Once you have this fundamental information, you can use it to start building an email database and strategy to continue to nurture the business relationship over time.
The third level of content is brand journalism – “which is not as much about selling your product, but selling your brand in a way that people associate your brand with a certain movement or certain topic,” says Newman.
You know what you want to say. Now, where and how are you going to tell your story? Are you going to go the more traditional route, or are you going to go online and take advantage of social media, blog posts, podcasts, influencers, etc.?
A word about social media.
Newman cautions that the demographics behind the well-known platforms are changing. “Facebook, which used to be for my daughter, is now for my mother,” he says. “Instagram and Snapchat are now for my daughter and son. Twitter is for me, and YouTube is for everybody.”
LinkedIn and similar platforms offer business owners the ability to target the right audiences with the right message at the right time.
A subtle but important takeaway: Don’t forget to communicate your content strategy with your internal team before you launch a campaign. Also, be sure to keep everyone in the loop as posts go up, and make sure you regularly encourage team members to comment and share the content you’ve posted.
Make a point to commit to communication. Remind your employees of your PR goals and your key brand messages in staff meetings and in every internal communication — these are “little reminders along the way where they understand what your brand is and what you want,” Newman explains.
The best content is dynamic and targeted, and not just written word. Think infographics, photos and video. “So, overall, [PR is] easier in a lot of ways – and it’s harder,” says Newman. “The stories need to be more defined. The audiences really need to be more defined. The content needs to be planned and ongoing. Once you start, this is not something you turn off. This is sort of a lifetime investment.”
The good news is that marketing technology, social media platforms and media companies like The Hodges Partnership offer business owners the data and information they need to create an actionable and trackable path toward success!
Headquartered in Richmond, VA, The Hodges Partnership specializes in media relations, social media and community management, corporate and internal communications, and much more. Learn more at http://hodgespart.com.