Knowing and Understanding the Value of a Business

Consistently keeping track of the business value of your client is a significant CFO Service. Business owners should be kept abreast of the value of their business on a quarterly basis. Business Valuation can be utilized and needed for the following purposes:

  • Obtaining financing
  • Company is being acquired or merged
  • Shareholder buyout or disputes
  • Personal Financial Statements
  • Employee Stock Ownership Plans (ESOP)
  • Litigation or Divorces
  • Conversion of Corporate Status from a C-Corp to an S-Corp
  • For Estate and Gift Tax Purposes
  • For purposes of the business Owners goal setting
  • Shareholder Buy and Sell Agreements

CFOs should calculate two different valuations. One such valuation is what I call the Book Valuation. This valuation uses the traditional metrics like sales, EBIT, cash flow and assets. The second valuation that should be made is what I call the Synergy Valuation. The Synergy Valuation is a valuation that a strategic buyer would pay. A strategic buyer is a buyer who is in the same business and will be able to take advantage of economies of scale and synergies. This buyer will probably pay a higher price than the book valuation.

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On Tracking Patents and Trademarks

A temporary CFO can provide the valuable service of keeping track of the Patents and Trademarks for a company. Patents and Trademarks are easy to lose track of due to how very complicated they can become. The situation only gets worse if there are several of them. Understanding where each Patent and Trademark is in the process will be one less area for a business owner to worry about. Suggesting patents and trademark opportunities is another CFO service. If your company imports be aware that if a product has FDA approval that there can be some discounts on duty and tariffs on those imports. Also be aware that if a company is not registered with the FDA for certain products that shipments can be refused at customs. I learned about this when I was tracking a patent for a client. Another important factor in tracking Trademarks and Patents is understanding the costs. Legal fees can get way out of hand. Most recently I have used www.legalzoom.com and had a lot of success in filing a trademark at a quarter of the cost.

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The Duty Of A CFO

Can be narrowed down to three separate things:

  1. Forecasting and Management of cash
  2. Identification and assessment of all risk and preparation plans to mitigate those risks
  3. Understanding of the things that make the specific industry they’re engaged in unique.

It’s absolutely vital to grasp these 3 concepts as soon as possible if you’re a CFO. You can play a major role in the success of your company and their strategic plan once you’ve mastered those three things.

The CFO really needs to be in tune with the company’s cash flow (cash being, after all, the life blood of any business). The CFO must prioritize what needs to be paid when they’re trying to manage cash for troubled companies. The Chief Financial Officer should use a 4 to 6 week model to forecast cash needs, because this model has been shown to work best. With such a model the CFO can manage the cash according to what needs to be paid.

The business owner can find the land-mines in their business by assessing and identifying risk (an invaluable service CFO’s provide business owners). It’s the difference between a cloudy day and a rainy day, and if the CFO can differentiate between the two and let the business owner know, they will be worth their weight in gold.

Often people will ask me why a numbers guy needs to know about the industry in which they work, and the specific business for which they work. To them I say such knowledge is critical both to manage cash for your business and to identify risk for your business. With out first knowing about that business, trying to manage their cash or find any threats is like reaching for a light switch in the dark.

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Business Forecasting Matters

Finding the right number of “what if” scenarios in order to identify enough possibilities of what is going to happen is what business forecasting is all about. Many business owners mistake it as a way of knowing for certain what will happen in the future. That’s never going to happen, of course, because no one can predict the future. There are innumerable variables to consider that could throw off even the most sophisticated forecast.

When creating the best possible forecast, the Chief Financial Officer has the task of identifying the top seven (or so) most likely scenarios and doing a full “what if “ analysis on each of those scenarios. Included in the seven scenarios should be a best case and worst case. The tool to figure those out is one that has together in one a Profit and Loss, a balance sheet, cash flow, inventory plan and sales forecast. As long as they’re adaptable to retail, manufacturing, distribution or services (depending upon what type of business) schedules can be broken down by quarter, month or even by week. Key metrics and where the risks and opportunities are also need to be included in the model (the great thing about which is whenever a number changes anywhere in this model, all the other numbers adjust).

This type of model is a tool Next Step CFO uses in business forecasting as a part of its CFO Services. This model shows a wide range of scenarios to the business owner, along with all the risks and opportunities associated with those scenarios.  When a business owner is provided with all the information a Next Step CFO business forecast gives them,  they have the knowledge they need to make their decision making process much more thorough than a business owner who makes a sloppy or lazy forecast, or a business owner who forgoes creating a business forecast altogether.  The more thorough the decision making process, the more reduced  risk to the business owner will be, so every business owner needs to recognize the importance of Business Forecasting.

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Should CFOs Get Involved With Search Engine Optimization (SEO)?

Does this sound a little out there? One CFO Service that I think adds real value to the business owner is a CFO who understands Search Engine Optimization (SEO). Who said that CFOs are all about the numbers? In todays business world the CFO has to provide services for their client that go beyond the numbers that really assess risk and find opportunity. In today’s High Tech world giving the business owner guidance on SEO can really provide another opportunity for the business that did not previously exist. The thing that makes SEO suited for the CFO as part of a CFO’s Duties is the detail orientation of a successful SEO plan. By understanding the components of a successful SEO plan and by properly delegating the plan to the right people the CFO can help the business owner generate more business and have added value as a CFO.

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Why CFOs Who Work Part-Time Are Valuable

The most cost effective and productive way to use a CFO is on a part time basis. In other words, as a business owner the thing to do is find yourself a CFO Consultant. Back in the day, Chief Financial Officers were commonly called controllers, and controllers would pay a lot of attention to monthly closings, financial statement preparation and profit planning. With today’s operating systems and more sophisticated accounting modules, CFOs can share their attention with areas that are more productive to the business owner. For example: CFOs can focus on business forecasting, inventory planning and reduction of risk. These aforementioned productive CFO duties and CFO services do not take full time manpower. You can even add a number of other CFO services and it still will not require a full time CFO. When you hire CFOs on a part time or temporary basis they will not require benefits as most are of independent contractor status. Part time CFOs are also your CFO as long as you want to keep them. The Business Owner will not get a two week notice because they found another job. In closing, CFOs who work on a part time basis are more valuable than a CFO who is a full time employee because they will tackle the most important issues in your business while being extremely cost effective.

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CFOs Who Understand The Risk Of Business Ownership

I’ll take a CFO who has owned a business before over anyone with a lot of practical experience and a lot of diplomas. My reasoning: the chief financial officer who has owned businesses actually understands the risk involved in being a business owner. Why? Because they too have been there. Choosing an outs sourced CFO with an owner’s perspective is a good move not only because they understand the risks and feel the risks of owning a business, they can identify those risks easily and quickly, making them much more valuable to the business owner than any CFO for hire who has never actually run a business themselves.

Until you feel how it feels to have an unsuccessful sale in retail, or know what it’s like to not be able to fill manufacturing orders because you did not have the right inventory or have not had enough cash flow to make payroll, or experience the pressure of employees underperforming you do not really understand. These are just a few of the issues that only business owners worry about and stay up nights thinking about, and no amount of practical experience or diplomas can replace it.

Employees and vendors do not worry about these issues nor do they have the owner’s perspective of these issues. If you’re looking for a CFO or temporary CFO, look for one who has owned a business before.  Not only does this CFO have the financial and business acumen to be productive, but also a mind set that only a business owner has. In short, they can really perform like a business partner without owning stock. The CFO who has owned a business gives the business owner another set of business owner eyes and that is invaluable.

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CFOs: Why Companies Need Them

One thing business owners hate is surprises (unless, of course, it’s one of those elusive pleasant surprises, but when is that ever the case?). The much more common unpleasant surprise is enough to give a business owner a gray hair or two. Chief Financial Officers, or CFOs, need to tell the business owner when it is cloudy, not when it is raining. This is a key role of the CFO: reducing the element of unpleasant surprise. Identifying cash flow problems before they occur and identifying inventory overstocks or shortages before they occur are just a few of many trouble spots that can be identified with the help of an outsourced CFO.

Today’s business owner wears so many hats and needs to be able to make decisions quickly. A temporary CFO can be brought in to identify and assess the risks involved in those quick decisions in a timely manner, so the business owner won’t miss a beat.Today’s CFO can also do many things to help reduce the business owner’s risk. One such example  is looking into the Corporate American Express Card. Qualifying for certain classifications of corporate American Express Cards will just have corporate liability and no personal liability.

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The Risk in Partnerships

When two or more people get into business together there is risk that needs constant assessment. Partners in business together must have the following characteristics:

 

  1. Must be logical in their thinking. It is not all about one partner. Sometimes the logical business decision can disadvantage one partner over the other(s). It is critical that the partner being disadvantaged is logical in their thinking to separate what is right for the business from what is right for the disadvantaged partner.
  2. Must eventually be at peace with all decisions. Although it is healthy to have different opinions and constructive arguments, eventually all partners must understand that a decision needs to be made and although it may be contrary to one partners opinion the dissenting partners must be at peace with the decisions.
  3. Partners cannot be bitter if they get diluted. There are many times when a business needs more money and the partners have to ante up. Sometimes there are partners who do not have the money or do not want to invest in their business at the particular point in time when money is needed. These partners who do not participate financially cannot be bitter when their stock ownership gets diluted. If it only fair to the partners who are risking the additional capital that they get stock for the risk they are taking.
  4. Partners must understand the rough and tumble world of commerce. Partners must be prepared for troubled times in the business. Exemplified by, lower salaries, difficult cash flow problems and personal guarantees. The character of the partners must be in harmony during these periods.
  5. Only one person can run the company. It is a good idea for one partner to take the lead role in the business. Be viewed by the suppliers, customers and employees as the point person. Sometimes this can make the partners not taking the lead role feel inferior and bitter.
  6. Not all partners are created equal with regard to salary. Partners must understand that different partners take different skills to the table. Some of those skills are more valuable to the business than others. The business needs to pay more money to the more valuable skill sets. You would not pay a store manager the same as a CEO. If one partner brings store management skills to the table that is valuable, but can be replaced with another store manager if the salary is out of hand. This is difficult for many partners to understand.

 

Sometimes business partners will call upon the CFO to be their mediator when they’re having a dispute, but partners need to keep their eyes open when they enter into business deals.

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CFOs Need A Diverse Set Of Capabilities

Chief Financial Officers in today’s business world need a diverse set of capabilities. Being responsible and managing money is an important CFO service, therefore the CFO needs to know a great deal about ALL facets of business and business ownership, including out of focus aspects such as marketing or manufacturing, to better do this job. The CFO might not start out an expert on every last detail of the business world, but developing a deeper knowledge of those out of focus areas is a great step towards broadening a CFO’s capabilities, making business owners take notice and consider what  an invaluable asset a CFO who really knows what they’re doing is in a business world that revolves around money.

 

Let’s take marketing, for example. On certain aspects of marketing (particularly website marketing and search engine optimization), a Part Time or Temporary CFO can provide some really useful insight and help clients a great deal. A business can attain top positions on Google and other search engines with a good Search Engine Optimization (SEO) strategy. Those kinds of positions will give the business a strong Internet Presence, thereby enhancing their current marketing strategy. Thanks to knowledge about a facet of business a bit outside their realm (marketing), the CFO in this example was able to do their job better.

 

On the subject of marketing and good SEO strategies, using an RSS feed will help you get top positions on Google and other search engines. Fresh up to the minute content can be provided for your website by an RSS feed. Reuters example of an RSS Feed is Reuters who services many news related websites with up to the minute news around the world through an RSS Feed. The best way for a business to use an RSS feed is to start a blog about their business and write articles daily about their business using key word rich content. Most Blogs have an RSS feed connection and connect the RSS Feed from the Blog to your website and every time you write an article about your business and post it to your blog it will change the content of your website. When you change the content of your website the search engine crawlers index your site. The more you change the content the more you get indexed by the search engines and indexing increases your search engine ranking.

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