Business Innovators Radio - Mark Nicholas and Jaimie Klawitter – Insight CPAs & Financial, PLLC and Strategic Navigators Accounting, PLLC

Episode Date: November 22, 2023

Mark Nicholas CPA, CVA, CFE, CFF, MAFF, and Jaimie Klawitter CPA, CVA are the Managing Partner and Manager, respectively, of Insight CPAs & Financial, PLLC as well as Strategic Navigators Accounting, PLLC. In this episode, they discuss business valuation and give practical tips for business owners to think about as they grow their business, think about a sale, or consider an acquisition. Both are certified business valuation experts and share stories and financial expertise that will allow entrepreneurs to ask themselves the right questions as they think about the future of their own businesses.Learn more about Mark and Jaimie’s accounting practices: https://insightcpafinancial.com/about-us/https://www.stratnavacct.com/aboutThere’s an old adage that says you should pay your fair share of taxes but not a penny more. We believe that to be true.We help business owners and high-income earners realize their savings by deploying time-tested tax strategies with decades of case law to back it up.Each strategy must pass through our sift of being legal, moral, and ethical.Get your complementary analysis to see how much you overpay on an annual basis. Click the link below to schedule your complimentary analysis.Learn More: https://www.stratnavinc.com/Schedule Call: https://www.navigatesni.com/NAVIGATEhttps://businessinnovatorsradio.com/navigateSource: https://businessinnovatorsradio.com/mark-nicholas-and-jaimie-klawitter-insight-cpas-financial-pllc-and-strategic-navigators-accounting-pllc

There's a lot of good tax strategies that I know we've worked with you on with common clients that have come into play and save them hundreds of thousands of dollars in taxes. Well, again, that's money in their pocket to be able to use to grow their business, expand their business, take out as compensation for themselves. And I'd rather have it than give it to the government. Hey, guys, welcome to the Navigate podcast with Strategic Navigators, where we save business owners 40 to 60% on their income taxes. I'm your co-host, Adam Dirkson.

Hey, this is Mitch Salanti, and today we're going to be discussing how to increase the value of your business and joining us today. We have back on the episode, Mark Nicholas. Mark is a CPA certified business valuation expert, certified fraud examiner amongst some other designations. And we also have Jamie Clawutter, who is a CPA, a certified business valuation expert, and also has her master's in accounting from University of Illinois. So Jamie and Mark, welcome to the podcast.

Thanks for coming on today. Thank you for having us. Thank you. We'll just have Adam kick us off with some questions we have prepared for you guys. Yeah, we wanted to bring in the big guns today. So we have a whole list of questions we want to get through and really want to bring value to those of our listeners who are business owners or if you're thinking about being a business owner,

something to keep in mind here. So I'll just fire off a few questions for you, Mark and Jamie. Just first off, what is business value and why does it matter to a business? So for business value, the simplest way to explain this is the simplest way for someone to think about it is really what is a buyer willing to pay for the business they're buying and what is a seller willing to receive. And there's a plethora of ways to value a business and more of comes down to what is the best way to value your business. And that's where you usually get someone involved to help you decide that. And the reason that the value actually matters, the value of your business, and to me, at least one of the biggest reasons is your exit strategy.

You always want to know where your exit strategy is going to be even from the beginning. So knowing what the value of your business is is going to give you a good idea of what you can get from it. What's your retirement plan look like? You know, where are you going? What are you wanting to do with this business? I've heard one of our tax strategies say oftentimes when we're meeting with clients, you need to begin with an end in mind. So I think that speaks exactly to what you said there.

Thank you. Yep. And to kind of add to that in some of the notes that you gave us a few things that I highlighted by having a higher business value and not only enhances your company's financial standing with lenders, but it also attracts investors, potential buyers and approves your overall market position. So this could be a game changer, someone who is trying, like, you said with an exit strategy or they want to be acquired or sell their business, whatever the

case, by having a business valuation expert on their team puts them a step ahead. It sounds like it will certainly help the process go a lot smoother. It certainly does. The need for business value certainly is everything has been talked about thus far. And secondarily, it's the things that you mentioned, Adam, if you're going to get bank loans, the value of your business is collateral. and your hope that your business can support the collateral, and I'd have to look for other sources of collateral, such as personal guarantees, falls into it. Using business valuation strategies to strengthen the look of your company

with better cash flow, better positioning, can help you in so many different ways, including if you're in a type of business that goes after bonding, especially in the construction industry, getting bonded helps to give the level of jobs you're going to get. The stronger bond rating you have and the larger amount that you're bonded for helps you get into the bigger jobs and the bigger situations and hopefully provide you expansion and growth. So knowing the value of your business and using that value effectively can help in so many different ways. Mark and Jamie, I'll let either of you answer this, but I want to know how to this.

debt affect value? So debt brings value down. So when you go take a loan for a million dollars, it literally drops the value of the company in some cases by a million dollars. As Jamie mentioned, there's different ways to look at value. But debt almost universally is a negative. Now, it doesn't mean that you shouldn't use debt effectively, but just to understand your debt position and not only the fact that you have to pay back the debt and what you're using the money for, but realize that if you're counting on the value of your company to support some initiative or plans that you have, minimizing the debt at those times is an effective strategy. So on the opposite end of that, looking how debt affects negative way,

how does cash flow affect the value? Well, exactly, as you just said, Adam, it goes the opposite. way. So the more cash you have on hands, the higher the value of your business is it increases your assets. So it looks better. And where that also comes in is how did you get your cash? If it's coming from earnings or your profit, then that's even better because you're actually making money on what you're doing. So it's increasing the value of your business, which is making you more attractable to those people that are going to want to buy you out or invest in you. And I've also heard one of our tax strategies say oftentimes,

your business is only worth what somebody is willing to pay for it, right? And I think in the few conversations that I've been in with acquisitions, the seller oftentimes thinks their business is worth more than it actually is, right? Yes. There's a lot of emotional value attached to it. Yeah. It's very personal. Yeah.

Can't sell the emotional value. So Mitch, I'll steal the next question here because I want to go for it. go into this, but when somebody is ready to sell their business, they reach out to you, they want to get a valuation of their business, how does that conversation start? And what are the next steps for somebody who wouldn't reach out to you? Well, the first thing out of her mouth is you're three to five years too late to maximize your value unless you're planning three to five years in the future. So begin with the end in mind.

It is. history matters in valuation. Not just what do your numbers look like today, but what's the strength of your cash flow? What's the strength of your growth? What's the strength of your business over the last several years speaks volumes and directly impacts value? So the wrong time to do it is when you're going,

oh, I have a potential buyer. I need to figure out what the value of my business is. great, but you didn't use everything you could to maximize the value for this potential. So planning ahead for three to five years and keeping in mind all the tenants of valuation as you go through running your business is key to maximizing that value. Yes, there are things you can do at the last minute to enhance your value and promote your value, but you left some things on the table by not thinking a few years of ahead. If I could go back just to one of your previous comments, Mark, you talked about builders.

I have a lot of clientele in my area that are builders. Does inventory positively or negatively affect an acquisition if you have surplus of inventory? So inventory definitely affects value. In any buyout situation, there's going to be due diligence that's done. And anyone that is looking to buy a business that has significant inventory is going to be looking at the age of the inventory. Likewise, in a business valuation, you look at the age of the inventory. If you have a bunch of obsolete inventory worth half a million dollars, and the likelihood that you're going to use that inventory or be able to sell that inventory is almost zero, then you really don't have inventory of $500,000. You have inventory zero or maybe a very small amount. It's certainly,

affects the value of your business by half million dollars potentially. That is not uncommon that people don't keep good track of their inventory and during a buyout the due diligence phase, they've already negotiated the price, etc. Subject to due diligence, they get to the due diligence phase, look at the inventory, the fixed assets, the things that the company didn't, did not share the details of initially. And then all of a sudden the price goes way down. because they didn't have a good handle on what their inventory or their fixed assets were really worth. Again, if you methodically understand it, take a look at it at least once a year and understand the value of your company and what is valuable inside your company, you're going to be in a better

position to negotiate a better price in the end. Yes, I want to go back to cash flow. And we mentioned how that affects value. So how can a business owner think about increasing cash flow? what are some strategies and some things that they can do practically there? So first and foremost is take a look at your tax situation. Do what you can to minimize your taxes. That's money in your pocket.

There's a lot of tax laws and rules out there that help you minimize your tax burden legitimately. Just a lot of things that people don't know, though. So as your business grows, a whole new area of the tax law can open up to you. As your income goes higher, there's new things. that come into play. The tax law is not written to be fair. It's written for all kinds of economic and political reasons. And making sure you are doing everything you can to minimize your taxes just keeps money in the business. Thus, the higher the cash flow, the more money available to the business, the more value there is. And if you can take that money and turn it into more profits by growing your

business or investing in the right equipment, the right inventory to sell to customers or new customers. You use that extra cash that you generate from things like minimizing your taxes and just make more money. The other biggest thing, especially since COVID has hit the last few years, take a strong look at your costs and your pricing. A lot of companies for decades went through the mindset that I'm going to adjust our prices and look at that once a year. And that was great before COVID. So these days, things can change quickly. Your supply chain can all of a sudden break down or your cost of supplies can skyrocket depending on what business you're in. Being fluid with your pricing and being reactive to what your costs are and what your market can bear.

And being able to be sure to adjust to those things when you can help some improve your cash flow. If you run your business the way so many have in the past and you take pricing for granted, you take costs for granted, you can leave a lot of value and a lot of cash on the table that you need to be successful on today's new volatile environment. Thank you for that. Jamie and Mark, and we've gone over your guys as credentials. I mean, we did a whole other podcast. Just talking about history of taxes and things like that. And we've gone into depth here as far as minimizing taxes. I think that perked up a lot of people's years. As an example, I see a lot of our clientele before working with us come in with

probably an average of 30 to maybe 42 percent that they're paying in taxes. So every dollar they're making 30 to 42 cents of that dollar is going to taxes. Is that good? Or what is a safe number? Or if you're allowed to share that, what is a good number that you like to see our clients get down to? You know, zero is not possible. This is not a good idea. I'm going to lay that out. So I'm going to kind of answer your question backwards. Yep.

Getting to a zero tax liability is actually should not be the goal because you're probably leaving money on the table. The tax bracket system is the less you make, the lower the bracket is. You likely in a healthy business, frankly, want to pay some level of taxes in my mind between 15 and 20. for federal taxes if you have a healthy profitable business. You don't want to be paying 30, 30, 37% or more in taxes if you can avoid it, but paying some is good because if you're constantly one year you pay none, the next year you pay high taxes, that doesn't work. You try to have good profits that generate reasonable tax burdens. That is the best long-term strategy to maximize your cash flow, which again, cash flow is how you build wealth. Cash flow is how you build value.

So if you're paying that 30% or more, it might be time for a conversation with a group, such as strategic navigators. Completely. Completely agree with that. There's a lot of good tax strategies that I know we've worked with you on with common clients that have come into play and save them hundreds of thousands of dollars in taxes. Well, again, that's, that's money in their pocket to be able to use to grow their business, expand their business, take out as compensation for themselves. And I'd rather have it than give it to the government. And that kind of just ties into, you know, having complete and reliable financial information

for minimizing your taxes and looking good on paper for lenders or the person who is planning to acquire your business. Yeah, the once of your look at your financial information is not a good strategy. for tax strategy and business value or no cash flow. Making sure you have good solid financial information that you understand and have advisors that can guide you on making good decisions throughout the year versus one time a year is very, very important. Mark and Jamie, when a business owner is thinking about a sale,

how do some of the strategies that you guys implement impact the value of the sale? So from a strategic standpoint, number one, if you've had the luxury of three to five years to work with a client to maximize that value, you have long-term plans and strategies to minimize debt, focus on the assets of the company and the value of those things, as well as look at the profits and the revenue growth of a company. those factors all affect value. I'll give you a small example here. Let's say a company didn't do the pre-planning, but they've had a good strong last 12 months. Well, for example, if you only show them a one-year history of revenue, it doesn't show the upward trend of the last 12 months

because maybe they put some things in place to react to the market that they didn't have new opportunities in. you now show revenue by month as opposed to by just once a year, you can show a trend in the numbers that helps create value in the mind of the buyer. So sometimes you have to dig into the numbers and look deeper than just what the surface tells you to figure out the trends. And you also have to understand and ask the right questions of the client of what they're doing internally, marketing, cost control, expansion, how do they deal with human resources? Maybe they have a few great people on their team that are really the drivers of things. All those aspects actually

create value of a company. So how you position yourself beyond the numbers and show the human resource aspects of what you have in your business. Show the marketing and the market that you're in. show the history and the plans you have, that all can impact value, far beyond the numbers sometimes. Okay, thank you for that. We've been talking a lot about the business owner on the sales side. Can you give us a little bit of an idea of how a buyer should be thinking about looking into a business when they're considering an acquisition? So from a buyer's standpoint, it's kind of on the flip side. you're looking at it. And yes, you want to know what the value is. You want to know what the potential is for your future benefit because you are buying this company to in the hopes of keeping it going and making a profit for yourself and having that exit strategy in mind of how then do you sell it.

But at the same time, you're also trying to figure out how in the eyes of the seller are you trying to minimize the value because you don't, you want to pay a better price. So you're always trying to use negotiating factors. in that value. So one thing is how have they used their debt? What does their inventory look like? All those things Mark has talked about, the buyers on the flip side, trying to figure out how do they minimize those value things

so that they can have a better price. Going back and forth between the two. That's what makes it fun. And are you guys the ones in communication, whether you're on the buyer or the seller side? Kind of like a realtor, are you the one communicating back and forth? Or is it business owner to business owner?

How does that communication work? It usually depends. I think it depends on the client and how involved they want you to be in the sale. A lot of the times, especially with bigger buyouts, it's the attorneys going back and forth and they're getting you involved as needed. If it's where we sometimes are involved in talking is if it's say the owner is maybe selling to someone within the business, so maybe one of their employees or maybe another partner. So it's not as much as negotiating as just final things of how to do it.

That's where maybe we are doing a little more of the talking with them because it's kind of already set in stone. It's just getting those fine details set out. What's been your experience with family business acquisitions? Didn't be that. Grandpa selling to, you know, son or grandson or whatever the case. This is tons of family businesses out there. And what I've learned through that process of being involved with some of them is that, you know,

Generation 1 doesn't want to gouge Generation 2 on a price. And at the same time, they still want to make enough money to retire from because that was the whole goal. They had the end in mind. But Generation 2 doesn't want to pay, you know, top dollar, typical mindset of a buyer. Don't want to pay top dollar. How do you navigate that conversation with family and maybe sprinkle in a little bit about how you can help minimize the tax burden? of that sale. Well, actually, I think the tax burden is the first place to start. You have opportunity when you're selling among family members that you don't have when you're selling to a

disinterested third party. So there are absolutely tax situations that you need to explore if you're looking at selling to family that would not be available otherwise. There are inheritance issues and certain provisions related to inheritance and beneficiaries that need to be explored first. So you understand all the options. Sometimes price is not always determined by price. It's determined by future benefits that occur down the road in an estate plan. So that's the first part you look at. You can get more creative with your options when it's selling to a family. Now, you are very correct that family dynamics can certainly cost problems. There are actually consultants, not inexpensive ones out there, that actually specialize in high dollar family

sales and designing them and navigating on purpose or navigating the problem ones directly. They are simply brought in to navigate problem families trying to sell. to the next generation. So a little bit of psychology or counseling. A lot of psychology. A lot of psychology there. Yeah. There is.

I was having a discussion last evening about a family situation, two brothers that own a company, along with a third party. And the brothers have to one up each other constantly. And that is causing all kinds of problems. And they have the opportunity to sell this business. But one brother doesn't want the other brother to be the one to be in. charge of the sale. It's a control issue at the point of sacrificing value and sales price. It even may kill the deal. And they are looking to bring in a consultant just for that purpose.

Problem is if you get to that point, a lot of the initial tax strategies and advantages you could have had if you learned how to communicate with each other, go away because you're just trying to problem solve and get through it. So family dynamics often play in. sometimes we can help with that. Sometimes you've got to bring in a heavy hitter with the family dynamics. But a tremendous opportunity of families if they will communicate. Mitch, I know I've been talking a lot. I have a lot of questions.

I have one big question left and then I'll try to keep my mouth shut. That's not up to. But one big question. So in a family, in a family buyout situation, kind of a long question, several parts to an answer here. But what I have seen in one example of a family buyout is generation one is ready to sell to generation two. So tell me if this is typical. If you were to go to your typical CPA, if this is what they would recommend. What I saw is that generation one, excuse me, generation two, who is buying the business, has to generate the income through the business, pay taxes on it and then pay generation one for buying the company.

and then generation one has to pay taxes on that income. So there's a double tax there. Is that typical or is there a better way to do a buyout? Is that often done and is that one of the options? Yes. Is it the ideal option? No. Again, with generations, you can get a little more creative of what you do

to minimize the overall tax impact and leave more money for both generations. So there's a lot of different tax strategies and benefits you can do that save you a lot in taxes and avoid the double taxation. But you're right in your example. And often the parties aren't willing to talk through things deep enough to explore those options. Frankly, sometimes they're not willing to spend the money to explore it. You've got to dig a little.

Is that because like a tax attorney, any time you hear the word attorney, you can hear the clock ticking in the background? Is that the reason why? Yeah. They short change themselves. They don't want to spend the money on the experts to help them through it and off into their detriment. They just think it's like buying a house. You know, look at the few bad things you need to fix and go to the bank, get your loan. And the brokers handle all the details you sign somewhere and you're done.

You can do that. Problem is you end up in a double taxation situation as well as you could have avoided paying as much for it. And you might have received more if you were the seller. Well, and I'll give one example. I was actually just working on it wasn't a family dynamic. It was one of those I mentioned where the owner was selling to an employee and actually worked with strategic navigators on a strategy that actually benefited both of them where, yes, you still have to pay tax.

You're not going to escape the tax when you go to sell your business. But the strategy there was that a lot of it is cash that ended up in their pocket that they're not paying tax on. It was just the creativity behind the strategy that was used. And I think what worked there is that both of them were willing to listen. There's all of questions and stuff going back and forth, but it really comes down to listening and asking those questions and just talking amongst each other. As long as the communications there, these strategies can work. Mark, as an entrepreneur yourself, I want to hear for you personally how you started to think about

business value for yourself when you got started and how you think of that now and how that's evolved? You know, I think I think of it in several different ways. First of all, I do a lot of expert witness testimony. So you may have a divorce case. You may have partners upset with each other, and they file a lawsuit that they need an expert for. So I think of it in terms of positioning for a litigation case and determining the value than having to justify that in a court of law. So that's one way to think about it. In terms of if you're a seller, figuring out who the best buyers are, there could be a internal buyer.

So maybe a long-term employee or a family member like we talked about, that's going to continue with a small ownership group that continues to run the company in whatever fashion makes sense. Again, last evening, I was with a consortium of business owners and we were talking about some business sales. One had successfully built a company that had multi-state support and they were doing about 30 million in sales each year and they had turned over running the business to two new presidents because they separated the company in two divisions. Where their idea of growth is not to sell the company and get out. They've created a holding company, and their strategy is to go find similar companies and buy them and make sure those companies value meets and results meet the requirements,

and they're creating a consortium of like companies to grow much quicker in the market. My point is you can use value in what you're looking to do, not just to sell your company in isolation, but you can use it for acquisition reasons that you want to buy other companies that are like yours to grow your market. You may want to join and merge with other companies or create a consortium, but understanding value is key there. Because the last thing you want to do is if you're an acquisition mode, buy companies that, that had inflated values that can't give you the return on investment. My point is, if you understand value, your options for what you do with your company actually grow very quickly.

There's a lot of very unique things you can do with your company, including considering taking your company public, you know, to be able to sell public stock on the exchange. A lot of options, if you understand what you're doing, beyond understanding just how to run your business. Mark, something you said there just got me thinking, it seems like one of the best ways to grow your business. For some reason, I just have the trades in my mind, whether it's a builder, you know, a rougher, plumber, electrician, someone like that. It seems like the best way to grow because there's not a whole lot of people that are filling those jobs in the trades, does seem like it'd be a good idea to acquire, have that holding company that you mentioned earlier,

to acquire other businesses in the trades. That way you take on their workforce as a way to gain employees. Am I on the right track there? Is that something? Yeah, 100%. We kind of hit on that earlier. And it's a great point to expand on that sometimes the value is not what the numbers, say your profit was, your cash flow was.

The value can be in the workforce. It can be in the geographic market. It can be in certain customers that another business has. as the value isn't always just in the profit and loss or the balance sheet. The value can go far beyond that. If you understand the profit and loss value, as well as all these other issues that feed value, you're in a better position to acquire other businesses because you can use that knowledge to get the best price and the best outcome for what you really want, whether it be the labor market,

whether it be customers, whether it be certain expertise of management, whatever that might be, whatever your end result is, you can get a better price for it if you understand it. I have one last question for you, too, and then we can open the floor in case we missed anything that you two want to touch on. But last question here is, you know, should a business owner have a business valuation prepared for their business every few years annually, like how should, we think about that? You've talked about that a little bit, but how often should that be? And maybe that depends on the stage of the company and things like that. And you are correct in that last

statement. So we're not expecting everyone to go out and get a business value every year. That would be very expensive for the company. And quite frankly, especially if you're in the early stage of your business, knowing the actual number isn't as important as how do you grow that number. so it's understanding what plays into the value of your company so that you can grow it. If you're getting closer to the end, I think that's where you start figuring out when do you get a business valuation or if you even need a business value but someone to help look at your business to see maybe give you an estimate or something. But I would definitely say in early stages, I wouldn't worry about going out and getting a professional opinion, but more of consulting with someone to see how do you grow your value and get it to where you want it to be. Thank you. Mark, any additional thoughts on that? No, I think that covers it well, and it's good advice.

Well, is there anything else that you guys feel like we missed that you want to touch on relate into the topic we've been on here? Nothing else I have. We covered it very well. I think we covered top to bottom the things to think about and look at. It does take resources to consider taking the time to learn this, understand it, consider it. But as your business grows, sometimes working in your business isn't as important as to working on your business. And understanding business value, utilizing effective tax strategies, is working on your business. Working in your business is being caught up in the operations each day. So when you find that you're growing big enough that you can work on your business, that's the time to start considering some of these thoughts. That's a really good closing thought.

I appreciate you sharing that, Mark. And thanks to both of you for coming on. Thanks for sharing everything you did. We appreciate your expertise and, you know, getting a chance to hear your thoughts on business value. Thank you for having us. Thank you. Thanks for listening to Navigate. If you're interested in learning more about strategic navigators,

feel free to click on the link in the description.