– On this episode of “Cyber Sentinel,” we’ve got a guest Eric from Neri Capital, and we’re gonna talk
about what your business is really worth. (upbeat techno music) Hello, I’m Alan Adcock. I’m CEO of ASC Group. We’re an IT and cyber security firm based here in Atlanta, Georgia. On this episode, I’m joined by Eric
Togneri from Neri Capital. And, tell us a little
bit about Neri Capital. – So we’re into our 13th year now, and what we do is help
companies determine, build, and realize the value
of their organizations. And so by determine, and I think what we’ll
speak about mainly today is the valuation of a company. How much is a company worth? And how important that is and how it impacts the daily decisions that forward-looking
entrepreneurs think about. And building is really
about how, over time, you can improve the value
of your organization. And there are many things that we will dive into
today regarding that. And then finally, we help
companies realize that value, and by that, the transfer
of the value of that company to another individual. – Awesome, Eric. So, we’ll get into the first questions. – [Man] How can I know if my business is worth investing more in? – Many entrepreneurs start a company without a clear vision of
where they wanna end up. How can Neri Capital
help those entrepreneurs establish a value mentality
for viewing their company as an asset, rather than just as a job? And, how does that change the way owners choose to invest in infrastructure and professional services, over time? – The assistance that we really provide around, first of all, getting a baseline. What is a company worth? And we have a whole
process that we utilize through a software called BizEquity. And what BizEquity has
done is make it affordable and easy for a company to,
first of all, get that baseline, and then over time, continue to have that as part of their planning process. And so, I can go to a business owner about any business owner, and they’ll be able to
tell me how much money they’re taking in and how
much money they’re making. But very few, in fact,
over 90% of companies, have no idea what their
company is really worth. They might have a preconceived notion, but they don’t really know. – Sure.
– And so, it’s important that they get this value mentality because another big number,
over 80% of the net worth of business owners, typically is tied up in the value of their company. It essentially is going to
be their retirement plan. And so it’s really, really important that not only do they figure
out what they’re worth, but then they start
going and understanding exactly what are the drivers of that worth and what are they doing, over time, to make their company more valuable. – Yeah, so when do you
recommend that an entrepreneur, or a business owner start
looking at that valuation? – Yeah, really as soon as you
get out of that startup phase in an organization, that’s
the best time to do it. And it should be run, just as you would run your P&L statements, or do your tax returns. Doing evaluation on your
company in regular intervals is just really critical. Because then, all of a sudden, the business owners start to understand exactly what they’re doing
daily to impact the business. And I’ll just give you a few examples. I mean, for instance,
how much is the business relied upon the business owner themselves? In other words, is it a
job or is it a company? – Right. – The more it’s a company, the more value that company holds. And so, one of the key inputs
into our valuation process is what’s the impact of the
owner leaving the business? In an ideal world, the owner should be
completely replaceable. And so, that’s really
managing towards that and that makes the company more valuable. Another key thing that folks
don’t tend to think about is what is the recurring
revenue that they have in their organization? In other words, what
type of revenue can they reasonably count on being able to repeat over and over again? So, companies like insurance companies have high degrees of recurring revenue. – Absolutely.
– Because people are just signing up. We’ve had insurance companies where the guy basically
turns off the lights and just rewrites policies every year and loses maybe five, maybe
10% of his business every year, but it’s still a small percentage and so that recurring revenue is credible. – Sure, almost like an annuity model, – That’s right.
– And those annual renewals going forward.
– That’s right. So when you look at companies
like software companies that are doing licensed agreements
and subscription models, anything like that makes a
business much more valuable, when often, people don’t think
about how that can actually be done within an organization. A great example of an organization that you wouldn’t think would have the possibility of having
a recurring revenue model was a real estate company
that we just sold. The real estate company started off as a residential real estate
company selling primarily homes in that sort of half
million to a million space, and was going transaction to transaction. Really, no recurring revenue whatsoever, other than a few real estate investors that were out there that
would rely upon them. But then, they added property
management to what they did and next thing you know,
they had created a model where their minimum contracts with their property management
side of their business were year-long contracts at a minimum. Some of them were five, 10-year contracts. And so, they already knew what they were gonna be
getting paid today years out. Well, that company sold
for an incredible multiple, and was incredibly attractive
to all kinds of individuals that were in and around
the real estate business, and it was a very easy
company for us to sell for that reason. So there are things like that that are kind of tangible examples of how a business owner can proactively start to think about their business. Not as I’ve taken this much revenue, and not as I take out $250,000 a year, from this business and
I’m living a nice life. They’re thinking more about when I have to exit this business, when that day comes, and it will, how is that value of the company, that 80% of their net worth, on average, how is that being managed
on the daily decisions? Because it’s very unlike,
stick with real estate, it’s very unlike real estate in the sense that you can’t slap on some
paint or remodel a kitchen. Like you could do that
within a couple of months and your house is ready
to be put on the market. Businesses take years and years to create the value of their organization. So the products and services, to bring it home back to your business, it becomes a matter of managing risks. So, if you’re a business owner and you have not protected yourself, you don’t have the right cyber
security measures in place, that business is at risk. It’s at risk.
– Yeah. Your work in automation
and those processes you put in place can evaporate. – That’s right, it can evaporate quickly. – Pretty quickly, if you
get targeted that way. Yeah, absolutely. That’s a great example,
too, on the real estate side because you typically
have real estate company that’s a very transactional
that’s not worth much. – That’s right. – Until they added that piece. That’s a great example of
being able to add value to that business over time.
– That’s right. – Perfect, thank you very much. – [Woman] What methods can I use to value my business most accurately? – So Eric, any time somebody
builds something from scratch, it’s gonna be really valuable to them. Probably more valuable to them than anybody else on the planet. So how does Neri Capital
use software and other tools to help owners really
understand what their company that they’ve invested
their lifetime, oftentimes, in building, what is it really worth, and how do y’all help
them to understand that? – Yeah, first of all, one of the main reasons
why business owners do not get valuations to their companies is because they’re afraid, frankly. Somebody’s gonna tell ’em
their baby’s ugly, right? – Yeah. (laughs)
– And so, that might not necessarily be the case, at all. But part of what we do is really
coming in and not insulting business owners, but allowing
them to see how simple it is, really to get a valuation,
which is basically, once we have access to their tax returns, and their balance sheets,
and their P&L statements, and we typically get three years trailing, and then we’ll work on wherever we are in their current cycle and project out. So in this case, we’d be
projecting out through 2019. What we do is just make it nonthreatening as we possibly can do it, and then once they have the knowledge, they feel like they’re so empowered because they realize that it’s important, the value of their company, they realize that it’s
something that they should do. It’s just like one of those things. Like you just don’t do it
because you don’t have to do it. – Right.
– You don’t have to do it. And once you get past that first step of collecting their information, they start to realize that
it’s not a threatening process, that it’s something where we’re
trying to partner with them, not only in giving them a number that this is what their company’s worth, but also talking to them about why that number is what it is, and the steps they can start taking to start building the
value of their company. We do well over a hundred
evaluations per year just in our company,
and about 80% of those turn into what we call value
building opportunities, which is really a business
owner saying, you know what? I’m not ready to sell my company now, but in five years from
now, I wanna be ready, to at least put my company
on the market, if I choose, if I choose. And so, what do they do between now and this arbitrary five
years down the road mark? And what are they doing
now in case something comes up that maybe
they didn’t anticipate? Health-wise or maybe it’s a
partnership that goes south, or whatever might end up happening. You wanna be ready for that day. You wanna understand what
the value of your company is, and you wanna be taking those
longterm, proactive steps to get it to where you want it to be when that day of exit does happen. – The sales and sales and sales, is the obvious driver
for valuation, right? To get those sales numbers
up as high as you can. Are there other areas that you
focus on in those valuations to help those companies
increase that value? – Yeah, I mean, revenue is a key input into any valuation model. But typically, businesses sell on profits. Earns before interest, taxes, depreciation, and amortization. And so, the common terms
that you’ll hear is, is oh, that business sold for a multiple of four times EBITDA, which is the acronym for that. And so, you get to the point
where you say, okay, well, profit is really key, so
we’ve gotta figure that out, but it’s also risk. And it’s either risks through
things like we let off with in cyber security, but
it’s also things like the ownership risk that we talked about. Can the owner be extracted from
the business or is it based totally on that owner’s
personal relationships? – Right, is it his personality? Is the owner the chief salesperson? If they leave, our sales just evaporate? – That’s right. So that’s a key one. The consolidation of
your top three customers and the importance that
has for the business, so if your top three customers
represent 5% of your business it’s a much less risky
organization to purchase if, say for instance, hey,
Chick-Fil-A is my biggest client and they do 80% of my business. – Sure. – So you get that, you’re in Atlanta. – Sure, you lose that contract renewal, and you’re in trouble.
– That’s right. So you’re reliant on very few customers. So what are companies doing proactively to mitigate that risk? And so, that’s another key thing. What type of growth is the
organization undergoing? Is it a stagnant organization? Is it an organization in decline, or is an organization in growth? The company is gonna be
more of value, obviously, if it’s growing.
– A growing company. – Both profitability and revenue. – And you see that
through those tax returns and that analysis of those numbers over the last three or four years. – Yeah, so that’s why we
get the three years trailing and we try to give credit
for what’s in process. So a reasonably forward-looking
forecast for typically we’ll do it within a year and that’s sort of generally acceptable to the business community. But that comes up with a
number of where they are. And so, okay, I found out, you know what? I’ve got too many eggs in one basket in my Chick-Fil-A example. Well, what are you doing
to bring on more customers and maybe taking some of that risk down to maybe it becomes 20%
in the example that I gave of the company. – Diversify that client base, yeah. – Diversify the client base. So that’s really kind of key. The big piece is really getting
folks over that first hurdle of I’m not afraid of what it’s gonna be. One of the key things that
we have been able to do through BizEquity, which
is sort of revolutionize the valuation business and why
we subscribe to their service and their software, is that
they’ve made it affordable. Once upon a time, for those
people that all they do is valuation work, we do
consulting work on value building, and we help people, our primary fuel for our
company is transactional, so we help people sell their business, or get investors, or
help them buy businesses. That’s where our lifeblood of our firm is, yet we’re able to subscribe
to a service like this and not be reliant on valuation
income for our organization. So, what does that mean
to a business owner? It means instead of
having to pay 10, $20,000 for a valuation of your company, if it’s not a very complex operation, we can do it for, say $2,500. So we’ll look at each
company individually, but it gets it down into
that affordable level. BizEquity coined the line that they have democratized valuation. And all that’s mean is
they’ve made it affordable for small business to
not only get a valuation, but continue to get them
over a course of time and make that a critical part
of their planning process. – Right, and since you
are involved heavily on the transaction side of this, it’s not just a paper valuation. It’s a valuation that
you could actually go and market that business
and get that money– – That’s right.
– for that owner, so it’s real, it’s real valuation. – Yeah, it’s real, and so, it’s key to when you
start pricing a business. Businesses are, it’s a little bit of art and a little bit of science. – Sure.
– Do you know what I mean? There’s some quantifiable numbers, but there’s also all kinds of factors. We find, with small
business owners, typically, they do what we call living
out of their business. And so, their personal finances
and their business finances get kind of tangled up. – Yes, they do. – Yeah, so different things happen and we kinda go through what those are, but to get to a real number. So, my typical situation is a
spouse will be on the payroll and it’ll turn out the spouse
is getting full-time wages and maybe chips in five
or 10 hours a week. So we see things like that. Personal vehicles running
through businesses, another common thing. Kids that are in college that are making $100,000
a year on the payroll, and they’re going to school full-time. You uncover all of these things, and so you have the hard numbers, and then you have sort of these softer, what we call discretionary
earnings numbers. And then, we come up with that, and then that’s all fed
into a software model with a very complex algorithm that BizEquity would
never share with anybody, unless you wanted to buy them. (laughs) – Sure, sure. – And so, we use the output
of that to say, okay well, if I took you to market today,
this would be our expectation for where the market would
land, but ultimately, like with real estate, I keep
going back to that model, ’cause people are comfortable
with it and understand it. It’s not as though, oh, I know
what my neighbor sold for, and their house is
about identical to mine, and so I’m guessing I’m
right around that mark. It’s not that easy. But once we do all of these addbacks, these discretionary
earnings, the hard numbers that are in their profit
and loss statements and on their tax returns, then we’re able to get
them into a ballpark range. And then what happens is, say a valuation comes
out to an even number, a million dollars is
the value of a company. If their company’s worth a million dollars on the valuation model, dependent upon how they’re
managing their company, that’s where the company is
really worth maybe $900,000, if they have a lot of risk
in their organization, or maybe it’s worth 1.2 million, if they’ve taken all
the steps they needed to to get their security
in place with their IT, to extract the business
owner from being essential to the company, and recurring revenue, and all these other things. Well, that’s where you get to
the upper end of the range, and how you get maximum value
and get a business owner into a position where they exit in the best position possible. – Excellent, yeah. And separate some of
those personal expenses out of the business, so that’s
kind of a separate entity– – Yeah.
– Going forward. Awesome, just great. – [Man] Are there ways to
increase the value of my business? – So Eric, here at ASC Group, we believe that evert business should have a professionally managed IT infrastructure to increase your productivity
and decrease your risks in that environment. How does Neri Capital work
with business owners over time to increase the value of those businesses when they come time to sell, and make sure that those business
owners get to exit on top? – Yeah, I mean, really
the main thing that we do is start with that valuation
that we’ve been talking about. And so, that’s a statement
of where we are today. We have a very candid conversation
with the business owner, and so, they kinda know
right where they are. And since meeting your organization, we’re integrating into our process, asking the right questions
around their IT security, and systems, so we certainly are bringing things like that up proactively,
but just as proactively, we partner with companies like yours, but also wealth managers. Are they thinking about their life legacy and how they’re setting
their organizations up and managing their overall net worth? Which might be in their
personal real estate, it might be in real estate
tied up with the business, it might be in the value of
the company that they own, or it might be in stocks and bonds or wherever they wanna put their money, but the accumulation of all
of that is their net worth. And so, we end up with
small business owners helping them understand
what role that plays in their overall portfolio, that being the value
of their organization. And then, how we work with
them is making sure that, okay, well, you don’t have
a wealth plan in place. It’s very important that they do that and start thinking about, okay, well, the business might be sufficiently valued for them to live their lifestyle
the way they wanna live in retirement, say, or to go
on and buy their next company. But they won’t know that
until they get the value of their organization in line, and think about their own
personal financial goals and get with a wealth manager, so we’ll bring in folks like that. If they have a CPA that’s
just doing tax work, but they’re the size that they really need an accountant in an advisory role, we will make sure that maybe
they get from a bookkeeper to somebody that’s really
able to help them manage in a more sophisticated
accounting environment. So those are just a couple of examples of what we do to help
business owners exit on top. – So, maybe not a full-time
CFO, but maybe a part-time CFO that comes in and helps
really look at those numbers, and figure out how to
increase their revenue, decrease those costs, and
get everything ready to sell. Are there other areas of the business outside the finance
part that y’all look at? Is there processes and that kind of thing that y’all look at trying to optimize? – Yeah, really, mainly around those areas that we talked about and
to evolving the business into a more valuable entity. But a lot of that has to do with how they’re
structuring their business, so what’s their revenue model? And helping them to realize
whether that’s suppressing or adding to the value
of their organization. So, we’ll identify those type of things and take proactive steps along with them in order to fix that problem. We use column CXO. So fill in the X, right?
– Got it. – So it could be an outsource CFO, ’cause we see there’s a financial problem. It could be a marketing problem. We work with a full
service marketing agency that we recommend routinely
to our clients, as well, to help them get their
marketing house in order, if that is the issue
within the organization. We have, basically, a strategic
human resource individual, so not somebody that’s managing payroll, somebody that’s thinking
about the human architecture in the company, the skillsets and
competencies in the company. And so, we’ll bring in
a human resource expert if there is, indeed, a void somewhere within the organization. Maybe job responsibilities aren’t aligned with competencies and so they can help out with getting that part fixed. – Absolutely. – Or maybe, if the owner is
irreplaceable at this moment, what are the steps that we’re taking in to make that business owner replaceable? And by that, I mean, maybe they are the top sales
guy in the organization. It’s time to start getting
some sales talent in there so that you can be more of a
general manager of a business, versus, hey, I’m reliant, I do the sales, I do the marketing, I take
out the trash, I do it all. – That’s right. If I go fishing, then there’s
nothing’s gonna happen while I’m gone. – Yeah, exactly.
– Yeah, exactly, great. So Neri can really bring
a whole team together to that business owner to
really maximize that company, over, I don’t know what that
period of time looks like, but over a period of time
to get ready for that sell, and to be able to exit on top.
– That’s exactly right. And so, we have a lot
of competence internally in terms of being able to
fulfill a consulting type role, and we just choose to focus
on valuation, value building, and value transfer of organizations. But where we don’t have of
in-house full-time expertise, we bring on partners like
yourself, CFOs, and accountants, and so on and so forth, as needed. – Excellent. – Yep.
– That’s great. So that’s all the questions
we’ve got for this episode of “Cyber Sentinel.” I wanna thank Eric for being
our guest from Neri Capital. Eric, how can people find you online? – They can find, overall
information on my company at nericap.com, and specifically
for business valuations, whatismybizworth.com is the place to go, and you can start your
online valuation for free. – Awesome, and you can find us at ascgrp.com or #cybersentinel. (soft music)