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Best Metrics: Welcome to the Best Metrics podcast. Each episode, we meet with industry experts to discuss how they evaluate financial statements, what metrics they commonly use, and how their clients have improved. We'll also gather suggestions of how you can incorporate the same insights and processes into your own practice. Thanks for listening and enjoy this episode.

Glenn Dunlap: Welcome back to the Best Metrics podcast. [00:00:30] Today, we're exploring a topic that every business owner should care about how to build a company that creates lasting wealth and real enterprise value. Joining us today is Michelle Hammond, the chief strategy officer at SS CPAs and advisors, and author of the new book Go Public and Private A Strategic Blueprint to Go From Owner to Investor. Michelle has spent more than two decades helping privately held businesses grow and increase their value and prepare for successful ownership transitions. Throughout her career, she has worked with organizations [00:01:00] ranging from closely held family businesses to larger enterprises, helping owners think beyond day to day operations and focus on building businesses that investors want to own. Michelle began her career working alongside publicly traded companies, where she saw where she saw firsthand the systems discipline and accountability that drive enterprise value. Today, she brings those same principles to privately held businesses through her work as an advisor, valuation expert and strategic leader. She is also recognized as a leader in the accounting [00:01:30] profession, having earned the CPA and AICPA Women to Watch Experienced Leader Award and serving in numerous leadership roles throughout her community and profession. In her book, Michelle challenges business owners to stop thinking like operators and start thinking like investors. She argues that every business has a stock price, whether it's publicly traded or not, and that owners should measure and manage their companies with the same focus on value creation that drives the success on the Wall Street. So, Michelle, welcome to the show.

Michele Hammann: Thanks, [00:02:00] Glenn.

Glenn Dunlap: Yeah, I'm I'm so excited. We've known each other for several years, and I had a chance to read your book a couple of weeks ago when right after it came out and I was so excited about it, I was like, there's so many, you know, nuggets in this book that I was like, I've got to, we got to get Michelle on the podcast. So I'm so excited that you're here to talk to us about this today.

Michele Hammann: So thank you, Glenn. I'm really excited. It was, it was a labor of love to get that put together. But I'm happy it's out in the world.

Glenn Dunlap: I bet it was. I bet it was. We could, um, it probably [00:02:30] would fill a podcast about how to write a book, but we'll, we'll, we'll set that aside for now.

Michele Hammann: It's not a podcast, Glenn. Just give somebody.

Glenn Dunlap: Just a lifetime, a lifetime of all this stuff. So, um, you know, um, I think, you know, the book introduces the idea that business owners should go public and private. And that's the title of the book. And I just love that. But, you know, by adopting the principles that, um, in the disciplines that public companies have without really giving up the control of going public. Before we dive [00:03:00] into specific metrics and talk about some of those things, would you tell us more about the philosophy and why you believe that so many business owners should consider something like this?

Michele Hammann: Yeah, it's it's something that kind of evolved over time. So SE is 100% employee owned CPA firm. So what that means is that every year we get a valuation done and we we know our share price, we know our stock price, all of our team members, they know what our share price, they know [00:03:30] our stock price and what and what it's worth and what it's worth to them. And so we have been able to kind of boil down some of our success to knowing this one number and started talking and thinking about, well, you know, public publicly traded companies, they have that every day. They have that every minute it's on your phone, right? Like they might be driven too much by it, but there's something there in the middle where if you know that the way that all of your goals [00:04:00] and forecasts are going to come together to impact value and what you've done all those years before, and how they show that you can keep doing it, but that can all boil down to one number. And that's kind of your enterprise value, which I, you know, it got down to also, Glenn, that, you know, you say that some business is worth $5 million incrementally, though. What what is that? It's $50 a share, right. Or whatever that really looks like. And so when you're talking [00:04:30] to your team about value, you feel like maybe you can move a $50 needle easier than you can move a $5 million needle.

Glenn Dunlap: That's interesting.

Michele Hammann: You know, just it's kind of just the, the, and it's, and it's relatable. Um, we talk about the price of Apple and Nvidia and, um, meta, right? All the time. Um, all businesses have a stock price and we share a ticker symbol and we can figure it out.

Glenn Dunlap: Sure. Yeah. Yeah. That's great. Well, in in the book, there were really [00:05:00] sort of a couple of themes that I felt like, you know, in our normal, um, conversation that we have here are around the financial metrics that, that, um, you know, owners within a particular industry might, might pay attention to whether it's construction or manufacturing or things like that. But when I was looking at your book, there were themes that I thought were just applicable across the board. Um, and one of the things that you say in there is that the, the financial metrics are those indicators are often lagging [00:05:30] indicators, right? Those financial metrics, but the operational metrics are, you know, where a lot of those things come into play. So let's talk about that a little bit. So what you know, what, when you talk about the those financial indicators being lagging indicators or the financial, sorry, financial results as lagging indicators, I keep saying financial indicators is lagging, but those financial results being lagging indicators. What are you. Let's let's explore that. What do you mean by that?

Michele Hammann: It's right. So, you know, every day I things are happening on the manufacturing [00:06:00] floor that aren't going to translate to a, an increased cost of sales that's eroding your margin. Um, and, and until you find out about it, it happens on, you know, June 1st, and then we don't get the books closed for June until July 15th. And we're 45 days behind a decision that could be made differently. Right. And the, if we could have that information in the hands of the people who are actually [00:06:30] doing the work that's producing our financial results, we can get in front of it faster. And I think that those metrics become more meaningful to the people who are actually making the decisions that are that are pushing the financial results.

Glenn Dunlap: Sure. Let's maybe let's explore some of those. So like when you walk out into the shop, I mean, how do you, what are the things that you start seeing right away that are operational indicators, metrics they should be measuring to, to have an impact on that. What is it? What are what are the things that [00:07:00] you commonly see?

Michele Hammann: So in the book, one of the ones that we talk about is we work with a coin operated laundry company. So they have all of the machines inside of the laundromats that you go to. Um, one of their biggest expenses is repairing those machines. And so we talk about minutes per repair and minutes per swap, because the mechanics, the repair technicians, they know how many minutes they spent. And we know what it equivocates [00:07:30] to in financial dollars. We don't need to tell them it's a $40 stop. You know, we just say, let's try to get everything done under 15 minutes. And so, um, we know that if, if we look at the roots and what people are doing and they're spending, they're going to, you know, ten stops and only working five hours, you know, we can, we can figure out what our actual repair costs are going to be. We can project that forward because we know the key inputs, and then we've assigned a financial [00:08:00] indicator to them. So it lets us know way before we wait for payroll to post in financials to get reconciled, and that whether or not we have a problem or not.

Glenn Dunlap: Right. And those are things that the people out in, out in the field can actually impact. They can have an effect on that, right? So there's things that that translates to, you were talking about your employees with the ESOP, everybody knowing kind of the, you know, what those metrics are. Well, are there common? [00:08:30] Are there common operational metrics that that would apply to a lot of industries, a lot of businesses? Are there things that are just or is it going to be very specific to each. Yeah. Okay.

Michele Hammann: So yeah, I feel like.

Glenn Dunlap: Our listeners can't see that, you.

Michele Hammann: Know, I'm sorry.

Glenn Dunlap: Yeah, yeah, yeah, yeah. You're, you're giving me the yeah, yeah, You know, like, come on, you know, it's like.

Michele Hammann: Well, there's across industries though, Glenn. There absolutely is. You know, I think, you know, I think of healthcare. I think [00:09:00] of the nursing homes we work with, you know, their biggest expense is labor. So we spend all of our time in nursing hours per patient day. Um, how many what's our census? Who's on the floor? How many nurses do we need to be able to, to take care of them to the right level, but not lose our shirt every single day because we have too many nurses there. And, you know, it's not 50 metrics. Glenn, you know, it's it's finding 2 or 3 where you can marry that operational [00:09:30] data with the financial data that really tells the story in a much more meaningful way.

Glenn Dunlap: Sure. And so then how do you recommend to business owners that they figure out what those 2 to 3 metrics are? Do you back into it from these are the financial metrics that we're trying to measure towards and then back into the operational ones that impact that? Or do you look at what, them. You know where where the company is struggling or what. How do you. How do you determine what those operational metrics are?

Michele Hammann: Yeah. So in the process that we have where we're helping them try to figure out what their [00:10:00] stock price is, um, we spend time saying, what are the key value drivers to increase your stock price? So, um, if we know that CPA firms sell for a high multiple, um, if they have a really good gross profit margin as it relates to revenue and cost of staff, um, then we'll spend a significant amount of time coming up with great ways to measure cost of staff, um, and try to marry it with the system that they already [00:10:30] have. You know, um, but there's also, um, looking at the, it's usually your biggest cost drivers, um, whether it's labor, um, or cost of sales, you know, that um, in your, in like for manufacturing, uh, if it's the input of the raw materials. You know it's right. Look at the big numbers first. And dig in. They're the ones that people can affect change with. You know, the the the root mechanic. He can [00:11:00] see how long he's spent somewhere. Um, and he can talk about ways that he could spend less time, better tools, better car, you know, like all of those things, more information before he gets there of what he needs to fix.

Glenn Dunlap: The right parts on the truck, those kinds of things. Exactly right.

Michele Hammann: Refill the truck timely. And so we knew that that was the biggest, uh, one of the biggest opportunities to improve their margins. Uh, and, and definitely [00:11:30] leaned into that and just kind of became part of their language. So that was from talking, um, on the operational side and not spending as much time on the financial statements, but talking to the team and what they're seeing.

Glenn Dunlap: Sure.

Michele Hammann: Mhm.

Glenn Dunlap: Sure. And so then that's going to ripple the decisions of everything. So like what parts we're carrying, what what tools they have, all those things. So then that's feedback. And then you can, you can have an impact on that. That's good. I, you know, I think, um, you know, working with business owners, being a business owner myself, I think that we're [00:12:00] surrounded by a ton of data, right? So how do you and data and metrics, how do you keep business owners from being overwhelmed by this? I mean the, you know, how many data points that they have to track and all the things that they have to follow? Is it, um, is it two metrics? Is it ten metrics? What are you looking at for somebody?

Michele Hammann: You know, sometimes I'll do like my goal list with, with our CEO Brian and he'll be like, okay, eight goals. That's amazing. And I really hope you can do that. But I think we all know that [00:12:30] nobody can.

Glenn Dunlap: Do.

Michele Hammann: More than three things in any given time, right?

Glenn Dunlap: That's right.

Michele Hammann: Yeah, yeah. So you might have ten metrics that you know and you care about, but you focus on three of them, you know. Right. And coming up with a plan for those in two, if, if they're two too big hairy goals. Right. And so, and, and then once you've, once you feel like it's become, uh, operationalized, systematized, kind of in the culture that just all the people who, um, [00:13:00] who take care of the technicians just know how many minutes we spend, you can move on to how many miles do we drive, how do we efficiently set up the routes so that we're not spending time driving between them, you know? And so it is definitely kind of how you eat an elephant. And those metrics over time, they just do, they evolve.

Glenn Dunlap: And what do they say? We don't remember any, any of the or all of the band member names for bands that are bigger than five people. Yeah. [00:13:30] So we know all the Beatles, but there are only four of them. Right? So.

Michele Hammann: Uh, exactly.

Glenn Dunlap: You get beyond five and you know, you can't name everybody in the Eagles. Forget about it. So no. Um, yeah. That's good. Um, so if a business owner is listening today and they're trying to decide on these things, how would you suggest they get started? Like what would be, you know, the first step that they would take to, to get to figuring out what these operational metrics are?

Michele Hammann: Yeah. [00:14:00] Um, you know, there's, there's two ways to reverse and to engineer it. You know, it's, what am I already tracking? What am I spending the time on?

Glenn Dunlap: Sure.

Michele Hammann: Um, and because we don't, we don't need to recreate the wheel, but maybe we could take the things that we're already tracking that are important and then add that financial data to them and go from operations to finance. Uh, the other way is to go from finance back to operations. And so taking your financials, benchmarking [00:14:30] it, um, against your peers, uh, benchmarking it against what you said you were going to be able to do, um, and seeing where the deficiencies are and then going all the way back to, to the operations that are creating, creating those opportunities for improvement. You know, there's, there's really two ways to probably more ways than that, but two ways that we kind of attack those things.

Glenn Dunlap: Yeah. Bottom up, top down, kind of different approaches. I like that. And I think if there, um, [00:15:00] you know, if they're already tracking things, that's a great place, but also they probably know what the challenges are already on their, both in the operations and also on the, you know, from a financial standpoint, which probably helps point them to like, you know, you know, if we fix the these areas, the low hanging fruit in these areas, then that starts to, to be the things where we can seriously move the needle. What role do you think employees play in all of this? You know, you've got the owners that are helping to decide some of these things, but how do how do employees [00:15:30] fit into this?

Michele Hammann: Yeah. Um, there nine times out of ten, the people making the day to day decisions. Yeah. Um, that are really impacting the actual financial results in the end. So having having them bought in and understanding the why of why these metrics are so important, can it it really can just change the whole feel about why we're doing things. We're not we're not asking you to have more build hours as a CPA firm because we like to watch you work. [00:16:00] We're doing it because it's a key performance indicator of the health of the organization, and that if we have build hours, we know eventually that translate to cash in bank, right? And if you have more build hours than we wanted you to, we know we need to hire more people. And so if we don't have enough, it means I need to find you more work. It's just a baseline of not, not, um, drudgery or a problem. It's just that we can all speak. They know how much they're able to do and to build [00:16:30] and what time they have and if they're full or not full. Um, and it's just how you structure your day. So if you can, if you can get the team engaged in that and the why behind it, it's not just to make more money, it's because it's how we run capacity.

Glenn Dunlap: Right, right. Yeah. Those are big things and they have to buy into it too. I mean, there's an element of that that they have to be able to see like, are those realistic targets? Can we buy into that? Can we achieve that? Um, and then there might be some stretch goals in [00:17:00] there, but if they don't believe it, that's then now you've got a real challenge on your hands. So they, you know. Yeah. I can remember in, um, it was the operations manager in a metal stamping facility for a few years and um, uptime was the biggest, a big target for us on keeping those presses running. And it's really not so much about the presses running. It's what you have to figure out to be ready for the, you know, the end of that, that steel coil or the end of that when it's time to change the, you know, the, uh, [00:17:30] the parts, the, you know, the production out. Um, you've got to be ready for that. Because if you're not ready for it, then that's where it really bites you. So it's, um, you know, keeping the presses running was was a big deal. But it's managing those downtimes that the, the scheduled ones and the unscheduled ones that big targets. But but everybody has to buy in them, you know, the, the press operators, the, the forklift drivers that are going to set up the, you know, steel coils, all this, everybody has to be prepped and ready. So it's so they've got the [00:18:00] team has to buy in for sure.

Michele Hammann: They do. And celebrating the wins and doing the things. It's just so important and making it a positive experience as opposed to a, you know, a, a punitive one. Um, I, I, I do feel like as a firm being 100% employee owned, like the proof they get in the pudding is there to know that their statement that they get at the end of every year, they're participating in the upside of the growth of the organization. [00:18:30] Every decision that they make, every, um, new idea that they have, or the way we improve our current structure eventually reflects in the stock price that they all get in. So it's really to be able to our one key metric is just a really big one with the stock price that hopefully everybody can see, or we work really hard to make sure that everybody can see how they can affect that and make real change.

Glenn Dunlap: Yeah. You earlier you mentioned that, um, some [00:19:00] from time to time, those, those, um, operational metrics that we're measuring will, that will change. That would be something that will be different. How often do you have suggest that owners review that and, and make changes to that as it, you know, when they've achieved those goals within those metrics and now we can move the needle on something else or how else do you how do you look at that?

Michele Hammann: Yeah. So we spend a lot of time with our clients doing forecasts, um, the base of [00:19:30] their stock price that we come up with is not based upon historical, it's based upon what they say that they can do and that they will do. And so that way we aren't comparing to what we did three years ago. We're saying, here's what we've done so far this year, and here's what we said we were going to do. And here's the three things that were important in that forecast for us to do to be able to reach that. So some of those forecasts we're doing and updating [00:20:00] every year, sometimes it's a two year depends on how big the how big the lift is on the things that they want to change. Um, but we're always measuring back to it. So their monthly financials are compared to forecasts not compared to, to what they did last year because they're a different company than they were last year.

Glenn Dunlap: Right, right. Yeah. So you're taking that forward looking approach versus the historical approach, which is what the market does, right? It's not what you've done. Yeah, yeah, yeah. That makes sense. What mistakes do you see um owners [00:20:30] make as they're trying to tie operational systems to the financial, you know, the, the outcomes on that or do you see Are there common mistakes that people make?

Michele Hammann: Yeah. Complexity and volume. Mhm. You don't you don't want this to be where we have to get out an Excel spreadsheet and call out for us to figure out each time what you know. It's simplicity. Um, on the operational side, we can get as complex as you want on [00:21:00] the, on the financial, um, uh, statement side, but on the operational side, considering simplicity and what we're asking people to do.

Glenn Dunlap: Yeah.

Michele Hammann: Mhm.

Glenn Dunlap: Yeah. I think that's, you know, you see that in a lot of like, um, uh, commission structures, right. It's, I don't know how much I'm going to make. This is so I'm not going to work towards that. It's, you know, it's too complex or too complicated to figure out or it's too dependent on other things that have happened that that, you [00:21:30] know, won't make it work. Yeah. Okay.

Michele Hammann: Oh, yeah. That's, uh, and that's so funny that you even mentioned the commission structure that. Absolutely. I work with a lot of financial advisors in the way they can come up with, um, splits and shares and this and that. Like, I'm like, guys, you're all going to make the same in the end. Like, what are, what are we doing? You know, like, let's, let's all come up with a way that we all succeed and win. And then I don't spend five days calculating who gets paid what.

Glenn Dunlap: Yeah.

Michele Hammann: That's more.

Glenn Dunlap: Yeah.

Michele Hammann: And let's find [00:22:00] a way to, to grow this together as opposed.

Glenn Dunlap: Did it impact performance. Yeah. Did it really impact performance. Because if I have no idea what my compensation is going to be, then chances are I wasn't working towards that anyway. Yes. Yeah. Yeah. I don't know.

Michele Hammann: You know, here's my paycheck.

Glenn Dunlap: The only thing you don't want to be a surprise down like, right. Like what? Like I thought I was yeah, yeah. That's not good. Um, let's, let's transition a little bit to the stock price and, and [00:22:30] the idea of, of establishing a stock price for a privately held company. So just walk me through that. What do you mean by that? How does a if I'm an owner of a of a company, how would I even begin to to look at that?

Michele Hammann: Yeah, absolutely. So, you know, to, to what you had said earlier, Glenn, the market doesn't buy what you have done. They buy what you say you're going to do. Right. Um, the, the act of consistent results helps your valuation. But really when you go [00:23:00] buy a stock, it's not for what they did last year, but it's for what they're going to do and the value that they're going to increase in the future. So we spend a lot of time talking about what that looks like and what the future looks like in the cash flows and what we're going to be able to build and generate. Then we use traditional valuation models to do a discounted cash flow approach and discount that back to current dollars. We compare it to what other places are selling for in the market for like a little reasonableness check. And [00:23:30] we have our price, and then we say we step back and say, okay, publicly traded companies to make sure that they reach that price are held accountable, um, with, with quarterly investor calls where you touch base and talk about what you did for the quarter and where you say that you're headed and are you really still headed there and just constantly checking in to see if you're doing what you say you're going to do?

Glenn Dunlap: Yeah. So I'm [00:24:00] going to stay on the stock price for a minute. And then, but thinking about that, like I can understand on the, in a public market, you can sort of see what are other companies trading for and how am I similar to that? Think about buying a house. And you know, they always pull comps for the house, right? So you can sort of see like, what are other houses the same size, same neighborhoods, those kind of things? What are they pulling for? When you're in a private company, how do you, how do you find that kind of data? Or how do you even have a sense of like, what are other companies like me worth?

Michele Hammann: Yeah. Most [00:24:30] business owners have a number and they've heard it at conferences. You know, it's really a multiple of EBITDA. They know what their buddies sold their business for. Um, and so they all kind of have some kind of rule of thumb or number, right. Great place to start, but probably.

Glenn Dunlap: Not wrong. Right? Yeah.

Michele Hammann: Because yeah.

Glenn Dunlap: Yeah, yeah.

Michele Hammann: Yeah. There's, there's a lot, there's a lot to unpack there, Glenn, but it's a great place to start and it [00:25:00] helps get everybody, you know, comfortable with the idea of valuation. Um, as a certified valuation analyst, I also spend a lot of time and there's just like for selling a house, Glenn, there's places that all of the business brokers and bankers who worked on deals put the multiples in for other closed deals. And so we can go into that by NAICs code by region, by sales and say, okay, well, historically and [00:25:30] it has. It's also really interesting to Glenn because you can get some fact point or some comparison data out of that. Yeah. This business was doing 10 million with 2 million EBITDA to the bottom line and sold for 20 million. And you're looking at your business, you're doing 10 million, but only 1 million is going to the bottom line. So what's what's up, you know, and so it provides just some comparison that's mostly historical looking and not based on your forecasts, but it's interesting. [00:26:00] Um, and it's kind of a fun process to go through, um, periodically to see what that looks like on the other side when we're coming up with that rate to discount your future cash flows by. It's influenced by today's market, the risk free rate, the return that people are getting in the public markets, and then also influenced by the rate of return that's expected for your industry, um, and the size of your company. So, um, Who [00:26:30] you are and how your business is doing compared to its peers, and then what's usually paid for the industry. It all impacts and affects your, your valuation. Um, and it can be represented in that, in that final number that we come up with.

Glenn Dunlap: Sure. Uh, what do you find are the, it's the greatest influence on affecting, um, you know, evaluation for a company. And it's probably different by different industries and things like that. But are there, are there some rules of [00:27:00] thumb that just say you've mentioned revenue, you've mentioned, uh, you know, net income or EBITDA or there's, there's some different factors that are going to come into that into play there. So like, what, what are you finding that influences that the most?

Michele Hammann: Um, on the financial side, you spend a lot of time looking at seller's discretionary cash flows, like what can come out of the business, you know, and what that really looks like and is, and like I said, if, is it, is it good or bad for your industry compared to your peers. But [00:27:30] really, there's the soft side of coming up with that capitalization rate that I was talking about. That's actually questions and discussion. Do you have a deep management bench? Do you only have two clients that are 95% of your revenue? Right. Do you do your financial statements on a regular basis, or do you wait for your accountant to tell you what you made at the end of every year? You know, so there's, there's the soft side of your actual valuation too, that [00:28:00] impacts the capitalization rate that we that is used for sure. And so that there's a, there's a lot of that in addition to just cash flow.

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Glenn Dunlap: What are the things that business owners think drive the most value that actually don't?

Michele Hammann: Well, that's a really good question. Um. Let's see here. I think the disconnect well, I don't know if they think it drives value. [00:29:30] I mean, what the biggest disconnect is where they've heard what somebody else sold for with some random multiple that isn't reflective of the of the situation. Right. Yeah. Their, their situation, um, not taking into account, uh, the amount of debt and other costs that they have in their balance embedded in their balance sheet, um, that they just keep investing in fixed assets at all costs, you know, like they, they continue to, [00:30:00] to double down on, um, on what they're currently doing. Um, but maybe it's not impacting margins and things as they really, as they really could be in the future. So I do think it is most, most of the discussion, most of the discussion points that I spend is, is trying to get people to understand that there's, you know, rules of thumb and industry and what you've heard. And then there's your, there's your business, you know, and many times they positioned themselves so strategically well that they would be [00:30:30] such a catch in my number that we're coming up with still isn't even as good as they could be with they sold to the right buyer. Um, um, but there is just the economic reality of here's what a, another business owner would pay for your business.

Glenn Dunlap: Well that's interesting. Yeah. I mean, your stock price is still based off of an estimation of the future values. But those, those future values could be even, you know, wildly different perceived by the the [00:31:00] buyer themselves. Right.

Michele Hammann: So that's right. Yeah. So we start with conservative Glenn. You know, we're not we're not doing evaluation and coming up with your stock price based upon the strategic partner out there that would be that can pick you up and add a whole bunch more to their. We call them the white knight, the white knight that's going to come in here and offer you triple of what I just told you, and I hope so. I wish that for everybody. And it does work. It does happen. You know you have something that they want. You know, and money. But that not all the time.

Glenn Dunlap: Well, [00:31:30] if you're managing it well and you've got the and you're positioned well, then that does probably brings more white knights to the table than than if you're not. Right. So, um, probably it gives your chances of a white knight versus a black swan.

Michele Hammann: Yeah. Yeah. Because if you get really good at forecasting and getting closer, getting, you know, above your forecast, you increase your value tremendously. Yeah. You know.

Glenn Dunlap: Your expectation is you're going to continue to [00:32:00] do the same. Yeah.

Michele Hammann: Yes. Yes. And when we we help on the on the buy side and the sell side for a number of clients. And usually it's one of our clients going to buy some, um, another business and we go in and we see maybe they don't have the best set of books. Um, maybe they're unable to forecast if they wanted to. Um, and they don't have all of the client contracts or employment contracts. Um, we [00:32:30] aren't sure about sales tax and use tax. Um, uh, compliance, um, and don't know their business, the price just drops so dramatically. Glenn and, and, and, and you think if they had just invested, you know, for a couple of years, right. Um, in some of those things, it's, it's a real different story. So that's part of the book going public and private. You never have to go public. You never have to sell to an [00:33:00] outside entity. But being ready for that for when it comes and if it comes, if you aren't going to transfer to family or employees, but really, if you're going to transfer to your family and employees, you really want to set them up for the best success.

Glenn Dunlap: You would think, right, right.

Michele Hammann: So maybe it's just good. Maybe it's just a good practice to be in.

Glenn Dunlap: So it's good practice. I mean, and it's not just for selling. It would be for financing too. Like whether you're, you know, taking on, uh, you know, um, loan [00:33:30] from a bank, a traditional lender or nontraditional lender or, um, even just an investment would also be, you know, not just from a sales standpoint, but, um, you know, you're setting yourself up for success. If you've done those things and you're in, you are managing that way.

Michele Hammann: So my banker friends, Glenn hate it, but I will say this, we're going to get a discount in the rate. Like if we can really do our own forecast because the bank, again, isn't lending upon the cash flow that you made five years ago in your historicals. If we can cash, [00:34:00] if we can forecast and show what we can do and that we do it consistently, we're getting that rate down, at least the fees, you know, because they love it. Bankers love the opportunity to be able to not have to do your forecast for you.

Glenn Dunlap: Yeah for sure. I mean, they've got to rate that as a risk. And, and if they can see that there's um, you're a lower risk because of the things that you've done historically and the way that you're managing the business today. That certainly makes sense.

Michele Hammann: Yeah. You're a banker's.

Glenn Dunlap: Dream. Well, yeah. What [00:34:30] um, let's say you're a you're a business owner, you've adopted this investor mentality and you're, you're looking, you're managing the business that way. What, what would change for you day to day in terms of the, the way that you would make decisions if you're thinking of it as an investor?

Michele Hammann: Yeah. Um, so you've got a plan, you've got a forecast. If you're making decisions that veer from that plan, does it enhance it or does it detract it? So it kind of puts [00:35:00] you in a, it gives you a framework for decisions.

Glenn Dunlap: Mhm.

Michele Hammann: Um, that does it increase the value or does it decrease the value. Um, do I care? You know, I have some clients that are like, no, I really want to do this. And I was absolutely, it's going to erode margins and do things for the short term, but for the long term. Do you think this is a good plan? You know, and so it kind of gives you that one number or the true north to kind of keep pointing yourself towards and having a decision [00:35:30] framework. Is it perfect? No. But is it better than the absence of that kind of information?

Glenn Dunlap: Right. Right, right. Yeah. It's the any road will if you don't know where you're going. Right. So so if you've got the map, you can do it. When you just said you were, you would ask them questions about their short term margins. The Tony Hawk talked to the AICPA conference one one year and said, you know, his his accountant, they called her the fun killer would always talk him [00:36:00] out of the decisions that he. Yeah, I'm hearing that voice, you know, the killer voice when you're saying those things. Yeah, yeah. Oh, sure. Is that what you want to do? Yeah. That's. Yeah. Yeah.

Michele Hammann: Fun killer. I'm going to get overexcited with a new plan or a new business or a new option, you know, or something big. So it's also personally and also for my client or clients. But, um, it's nice to have that governor for me. Um, because I definitely am like, yes, let's do it. This sounds amazing. [00:36:30] Let's go, let's go.

Glenn Dunlap: I know you're not the fun killer. Michelle. I was hearing that voice. I was just hearing that voice. I think, I think a lot of owners, I've seen this with the companies that I've worked with. Um, over time, they equate profits with value. Right. And I think, um, you know, is that, um, is that an appropriate thing? Should they be managing towards profits? I mean, the flip side is you probably are getting people telling you to minimize profits so that you are minimizing tax, right? So, so there's [00:37:00] always sort of those, those two things, but like, um, are those, is it a good thing for a business owner? I think you've already, we've talked about this a little bit, but I'm just going to specifically ask that question in terms of profits and value.

Michele Hammann: Yeah, absolutely. You know, yeah. A profitable business that exceeds its peers is is incredibly important, right? You're going to command a higher premium than what, uh, what is usually seen in the market if you can show consistent profitability, but that is one leg [00:37:30] of the stool. The other leg is cash flow. Um, and um, that you also need to be looking at a lot of those metrics that are informing how much, how much cash you're able to bring and put into the bank with your accounts receivable payable and debt structure and all of those things that are on that other statement also really impact value. And then third, we don't have necessarily on that leg of the stool a statement for it. Um, where we're looking at all of those intangibles. [00:38:00] How are you documenting your IP? How are you making your best employees, your management team sticky so that they don't leave in a transaction? There's a lot of soft side to increasing your enterprise value as well. That, um, that even exceeds what we see in the financial statements.

Glenn Dunlap: So it's an interesting thing. Do you do you? You mentioned not having a statement for it, but once you've met with a company and you've identified that IP is a big deal and our agreements are a big deal. And you know those. Do you have that? Do you manage that checklist as [00:38:30] things are going forward? So you've created in essence, you've created a statement. It's just not one that we've named as a as cash flow statement or something like that.

Michele Hammann: It doesn't come out of your. Yeah. It doesn't come out of QuickBooks or intact, but what it does where that number kind of goes into the valuation is it impacts the capitalization rate that we use for future value of cash flows. If, if you if this is really just based upon one person and you have no management bench, that [00:39:00] key risk discount, that key risk, like that's bad, right? Sure. Your value is not going to improve until you've invested in building out the bench. Or some of our clients just say, I'm the key person. We're riding this out till the end. I don't care about the value. Like, you know, like that. I just I don't want to invest. I don't want to invest in a management team. I don't want to have to do these things. I'm fine with this value, Michelle. And I'm like, cool. Like that's, but we know the number.

Glenn Dunlap: Then you've made the decision, right? But you've consciously [00:39:30] made the decision as opposed to getting to the end of your career and going, oh boy, I didn't do any of the things I needed to do to build the value there. So yes, yeah, I have an old friend of mine would always say, you've either got to make enough money and take it out of your business and invest it somewhere else. You've got to build a business to have some sort of tangible value that you can transfer. You can do both, but you really can't do neither. And so the the example you were giving is that sometimes it's okay to, to, to have a business that you are the, the [00:40:00] focal point of the business. And it's the value is around you. As long as you're making what you need to pull out of the business and to invest and to have the future that you're looking for, that's an okay decision. You can you can make that decision. Right? So, and there are probably some listeners that are going, I'm in that spot right now. And that's, you know, that's who you know, that's what my business is. It's it'll always be that way.

Michele Hammann: And it's, that's a great business. That's, that's, that is funding your financial independence and the way that it needs to. And deciding to do more or different may not yield [00:40:30] what you wanted to. In the end, it. And walking through that path, I was just talking to, um, actually the, the woman who helped record the audiobook, um, she, she has a large network of people who do the recordings and help you with the process. And, and she said, well, as soon as I started adding middle managers to that, this wasn't fun anymore.

Glenn Dunlap: No.

Michele Hammann: She's like, I'm fine working with talent and doing the things and putting it together, but I don't want to [00:41:00] manage seven people. And I was like, yeah, she knows my value probably isn't going to grow because. And I said, that's the that's a great decision though. Are you making good money? Are you happy? Are you having fun? You put in some away just because we don't have something big to sell at the end. Doesn't mean we won't have something big at the end.

Glenn Dunlap: So that's.

Michele Hammann: Right. Um, it's, uh, it's just understanding where you're headed, you know, and the value proposition.

Glenn Dunlap: There and making those choices as opposed to just sort of, you know, getting there and going. I didn't even think about this. [00:41:30] And now I wish I would have made different decisions somewhere along the way because now we're, you know, it's hard to hard to back into that. Well, if, um, how could accountants and advisors help their clients to think more like investors? What's, how do in if you're in that role, what do you do to, to kind of flip that mindset? A lot of times for an owner to be thinking about the owner operator versus an investor.

Michele Hammann: Yeah. I mean, we as CPAs are in such a unique, a unique position. We [00:42:00] know their business history, we know their family history. Many times we're just talking a little bit about historical. But a lot of us get to sit looking forward with our clients and asking them about what they're trying to accomplish and what that looks like, and how we can help support them in that. And just talking about their goals and their and their dreams, not their exit. Glenn, one of the reasons that I wrote this book is I firmly believe that most business owners, why they want to have a huge exit [00:42:30] and reach financial independence, maybe they aren't ready to quit their job and retire just yet. And so let's frame this as to just growing to where we want to be and who we want to be, and to fund that financial independence regardless of whatever that exit looks like. Well, you know, we'll be built for it when it gets here, but let's just focus on growth. Um, and, and making sure that you reach your, your goals. So we pair it a lot with the financial planning process for our business [00:43:00] owners talking to them about, you know, in ten years, where do you want to be? Not when you're retired, but in ten years, do you want that house in Florida in ten years? Do you want to be working 80 hours a week? What are the things that we need to do to get there and come back into that number?

Glenn Dunlap: Yeah, yeah. That's good. I mean, it's um what do you think surprises most business owners when it comes to what investors are thinking about in terms of, uh, you know, our buyers about the valuation, is there, are there things [00:43:30] that get surprised about? And I'll give you an example of what I'm thinking along those lines. I think a lot of times, um, business owners, when they're thinking about selling, they might have a number in mind, but they're not thinking about the competition of if I'm an investor or a buyer, I'm not just looking at your business in a vacuum. I'm looking at 100 other opportunities at the same time. And so I'm evaluating your, your business against all of the other opportunities. And I'm being presented [00:44:00] right now. And so then there's, there can be a, you know, a frustration with, but I thought my business was worth, you know, this much. And now like some other industry is hot or there's a, you know, or the markets have changed or something like, you know, so but are there things like that, that you, that you find that kind of surprise, um, owners when it, when they're thinking, when they get to those conversations with investors or buyers?

Michele Hammann: Yeah, absolutely. There's a, there's a lot of surprises, [00:44:30] you know, whole process and the deals that you think might be the right for you, whether it's transferring to your team members, selling to an outside party, um, they all come with different surprises. Um, I think, I think one of the biggest surprises, because a client may have a number in their mind, or we might come up with a number, but when it comes down to time to have that exit, the terms are just as important as the price. [00:45:00] I always say your price, my terms. Um, because if we get the money up front versus over time, are we the bank? What does it look like? What's my earnout structure and how does that all really fit together? I think that, you know, um, spending the time to understand the whole deal. Um, how long are you willing to work for? What's my culture fit? You know, um, and, and I've seen it work beautifully and I've, I've seen a lot of surprises though as well.

Glenn Dunlap: Yeah. [00:45:30] And being prepared for, for those, I mean, I think, I think his owners now throw a pandemic into the mix and, and all of us now kind of go, yeah, we don't know what's going to be thrown our direction. Right? I mean, up until that point, we all kind of thought we had it figured out. It's always up and to the right and, and it's going to be fine. And, and then we went, huh, like, what's what's going on here?

Michele Hammann: So, and AI is going to take all of our jobs. Glenn. So how's my business going to be worth anything if you never need another [00:46:00] accountant to help with your taxes? Come on. You know, but and that that's today and then in next year, what is it going to look like? And, you know, you look at the valuations of some publicly traded companies that are in your industry. You know, so, um, we watch CBS, we watch Intuit, you know, and then, you know, Intuit getting slammed for this possible impact of AI. And those timing of when you sell your business also matters, just like you said, Glenn, you know, [00:46:30] and so having enough runway to be able to weather the storms, um, and go through them and change and evolve through it so that you have something even more valuable on the other side. Um, and is, is, is really important. It's that, um, the ability to bounce back that we have as business owners, um, uh, and to, to, to weather this storm and the changes that really sets us apart from, from just all of our [00:47:00] team members.

Glenn Dunlap: Yeah. Yeah. Well, and I think the thing you've said before in terms of, um, you know, preparing all of these things and looking not just at the financials, but the forecast. And then also the, the intangibles that she like are the things, are we preparing for those, those downsides? And can we, can we weather those storms, whatever they, you know, because what we don't know is what we do know is that our forecast is going to be wrong. We just don't.

Michele Hammann: Know. Yeah. The minute we make them, they're wrong. You know they're. [00:47:30]

Glenn Dunlap: Wrong.

Michele Hammann: Yeah. They're wrong. They've changed. And that's why we do our quarterly investment updates. So, you know, at publicly traded companies, the CEO gets on the phone with all of the analysts and says, here's why we made forecasts. Here's where we didn't make forecasts. Here is where I see the threats and the opportunities in the future. And here's how we're responding to them. Quarterly is a lot. If a business owner can at least sit down and do that three times a year. Yep. You know, where am I to plan? [00:48:00] What do I see around the corner? You're already looking at industry. You're talking to your suppliers, you're listening to your clients, but sit down and synthesize that, um, and really think about what does that do for the forecast and what do we need to do in the future? Um.

Glenn Dunlap: Yeah, I love that. So in the book, you talk about those, those, um, quarterly meetings, investor meetings, um, you know, and um, part of that is, is like, were you having that call with or that meeting with? Right. [00:48:30] So you talk about the, the advisors and, and advisory board and, and bringing that team together. Um, and you give some great examples of different personalities and types of people to bring to bring to those meetings. I love that, but what are some thoughts? So like if you're a small business owner and, and it's been you and your spouse and, you know, your, your board meetings have been around the dinner table, um, uh, you know, and that's fine. But as you start to think about bringing other people to the table, what are some thoughts about who, who do you, who do you [00:49:00] want to have on that call? Who, who are some people that can really help you as you're trying to make this transition from, you know, to go public and private.

Michele Hammann: Yeah, absolutely. You know, crafting your own board of directors, your own advisory board, getting people who are engaged in your success around the table. Yeah. Um, you know, uh, it's just, it just helps you get out of that feedback loop of maybe you, your spouse and a lot of people talk to their management team. That's [00:49:30] always, you know, that they have a different vested interest, you know, um, but finding some people in, in your industry or even not in your industry, um, people with different backgrounds from, from accounting to legal to banking, you know, with just some, some different opinions as it relates to how they've approached things before and are willing to listen and be open to helping you grow your business. Um, for a baby first step. Um, what [00:50:00] we've, I wrote a blog about this on the on my website. Ai isn't a bad board member. I'm inclined. We can help our clients start some projects and in the project they put their information in there, their forecast, their plan, their industry, and on a quarterly basis, they go in and and have Claude asking a set of questions, you know, and bounce ideas back and forth. Maybe then take that back to your spouse, you know? Right. It's a starting [00:50:30] point before you get before you rally the troops and, and set up your own board, you know, just, even just taking that time to, to step back and to gather other information. Sure. Of you. It's really, it's really fascinating.

Glenn Dunlap: I'm not going to get the council, uh, rolls. Right. But have you seen the they, they suggest in Claude, if you're going to do something like that, they use a council approach and it's that you've got the, you know, the different people that play the different roles, the, you [00:51:00] know, the devil's advocate, the advocate, the person you know, the naysayer, whatever. There's all the different titles for it. But it's, it's a great way to have different perspectives brought to the table and then have, have one that synthesizes that and brings those, those together. That's, um, it's an interesting way to have it. Um, I think it'd be, um, I've seen examples of people loading their board slide deck in there and saying, okay, what are the worst questions I'm going to get from this and then revise, help me revise [00:51:30] this deck, help me get prepared for that and be ready for it. So yeah, well, and that's, yeah, there's some great tools for that. But I think the, uh, the other perspective, the thing that, um, I love, I love the idea of using Claude and, and, uh, you know, other tools. But I think the other thing that's missing a lot of times from that is that perspective that a person that knows the local market that knows you, knows your team knows those things. So it's, um, it could be a great, great way to do that. You mentioned you listed some [00:52:00] professionals like accountants, attorneys, bankers, that kind of thing. Um, who else makes great advisory board members? Um, do you, would you say other, uh, business owners, would it necessarily be friends and people who know you? Or would it be somebody else in the community that could, you know, is really going to, you know, kind of call your bluff on some of those things or what, how do you, how do you find the right, right mix of people there?

Michele Hammann: Yeah. Glenna I business, other business fellow business owners are so important [00:52:30] to that. Sometimes I find that you don't necessarily want them in the same industry just for transparency and feeling like you can be incredibly open. But there there's other business owners, you know, who you've connected with over the years that might be a good sounding board and, um, have, have that, uh, the ability to ask the next right question to be able to get you to think a little bit, uh, a little bit differently. Um, because they've been in it before. You know, most [00:53:00] most business ideas and most business problems are just a form of something else that just happened before, right? Like they, they have on it, they have on a different hat and they're, they look different. Right? But most of the problems that we face are some something like somebody has seen before. Um, so, um, and having a framework and a team that you can approach with, here are the fact patterns, here are the things ask me the questions, you know, because that's what the board, [00:53:30] that's what a board is for. Not to recap historically how you've done, um, but to help you craft where you've been or where you're going and, um, and to help really, you know, and help navigate those uncertain times.

Glenn Dunlap: I love that. I love that. Well, let me ask you a couple of the negative side of this. So like, um, you know, what are, what are some of the big mistakes that you've seen owners who haven't thought like Investors. What have they made? What [00:54:00] are some of the biggest mistakes that they've made? And, and, you know, were there where hopefully they were recoverable, but maybe they weren't, I don't know. But are there things other than just getting to the end of your, you know, of your business career and then going, I don't have anything to, to transfer. Maybe there's something else. What have you seen any others that come to mind that I'm putting you on the spot to think about?

Michele Hammann: Yeah, I got plenty. I got I got plenty. Unfortunately, unfortunately. You want my list? Yeah.

Glenn Dunlap: Yeah.

Michele Hammann: Right.

Glenn Dunlap: I [00:54:30] can add some to this list.

Michele Hammann: Yeah, exactly. You know, there's, there's a lot of of going down the rabbit hole, um, thinking that this one thing is the solution when usually it's a, it's a myriad of things that are the solution. Um, getting in that feedback loop with themselves where they're telling themselves, yeah, that this is the right thing to be doing and then ending up somewhere that they didn't want to be. Um, not doing due diligence. Um, I have, uh, I have I have been accused of and they are not wrong. [00:55:00] Getting overly excited about things and maybe not spending the time to really do the due diligence in the thought process and getting things laid out to begin with, because I'm so excited about where we're going. I have a story in the in the book about, you know, two people who started a partnership and they were very excited about where they were going, but they didn't spend the time on the documents and the, you know, you need an exit. Exit plan isn't something when you're in a partnership that you should be doing at the end, [00:55:30] you do it when you start. Yeah. Right. It's the it's the prenup discussion that feels kind of gross, but it protects both parties all the way through and you don't have to worry about it anymore. Um, so I, you know, a lot of we can correct a lot of things early in to a business life cycle. Um, if we have hasn't been set up appropriately with the organizational documents and that stuff, but it's really hard to correct right before a sale. Um, that's when it's really gross [00:56:00] and it doesn't work out for anybody.

Glenn Dunlap: Yeah.

Michele Hammann: That's probably one of the worst.

Glenn Dunlap: Yeah. If you're being forced to make that change to if there's something that's you've come, you've come to loggerheads with your partner and all of a sudden now then it's a, that's an awful time to be figuring that stuff out.

Michele Hammann: It's the worst time. Or when you're doing it with the, with your spouse because you didn't have it done and they're gone, you know? And so those are the worst stories that I can think of. Um, there's, um, but then there's also just, you know, wasting resources and time, you [00:56:30] know, um, and heading down, heading down paths that really aren't creating value, but sound like they could be, uh, a lot of our clients will pick non complementary businesses to theirs. Um, thinking that, uh, that they, um, if they spend the time and the money and that they're diversifying, um, and keep buying more small businesses when we had just taken that money and put it in the stock market, um, that we were saying.

Glenn Dunlap: Yeah.

Michele Hammann: I know. You know, [00:57:00] um, and underestimating the amount of work and capital that things really take.

Glenn Dunlap: Yeah, it really does. It's um, and just the energy to, to stay on top of those things and to, to know the, you know, the right decisions to make in those. I mean, now think about if you've got three metrics and every one of those, those businesses and they're all different and you're, you're having to track all of that. That's a, that's a much different. Um. Well, so one of the things that you know from our conversation that I think is pretty encouraging [00:57:30] if I think about the, the idea of, um, being a business owner and trying to make that switch to an investor and thinking about like all of the steps that it would take if you're, if you're actually going public. Oh my God, that seems like daunting, right? Like, you know, especially for, um, uh, you know, a, an early stage company, uh, I'm avoiding using small because you tell us in the book not to use small. Right? So we're not I'm not using small business. So we're it's an early stage company, right? So but [00:58:00] the idea of, of, of being able to start and sort of work through this, I mean, what I'm hearing you say is to look at the, you can look at your financials, you can look at the operations, you can determine those operating metrics. You can use that to start managing the business towards that, doing the forecasting. Um, you can start with even using Claude as your advisory board and doing those calls and prepping for that. But you can start stepping into those things and behaving that way and making those transitions. I think it's, um, it's a pretty encouraging [00:58:30] process to think about, you know, it's not all at once and it's not something, but, but it is something that can have a huge impact on your business.

Michele Hammann: Absolutely. Just, uh, picking the things that would move the value the most and doing those, it will be improving your operational metrics and your finances, but it's also looking to see what other value steps that you can make. Um, improving your employee stickiness, um, [00:59:00] with employee compensation tied to performance or stock price, making sure your partnership agreements are great, making sure your capital stack is you don't have to do it all at once. If we were going public and we promised everybody that we were going to be issuing our IPO by the end of June, right, we would have to get it done all at once. You don't have an exit date. As a as a business owner, we get to grow and do it at your timeline and the things that you want to accomplish, increasing the value and to, to the things you want to invest [00:59:30] in, you're the investor. Um, and so, you know, we always just, we go through the information, we identify what we know today, and then we just let our clients pick the next right thing. Just do the next right thing.

Glenn Dunlap: Yeah, I love it. Yeah. Michelle, if somebody wants to learn more about the book or learn more about you or about the services you offer, where do they go?

Michele Hammann: Check. Check out the book at Go Public in private.com. Feel free to hit me up on LinkedIn. It's Michelle Hammond and I work at ZK and [01:00:00] check out our website for the firm ZK cpas.com.

Glenn Dunlap: That's awesome. Well, I always love talking to you. Um, congratulations on the book. It's, it's, um, you know, it's a, it's a great read and it's, uh, as a business owner, it's, uh, it challenged me in a lot of spots. And I'm sure that as, um, anybody else that's reading it as, uh, you know, as an owner, as an advisor, as an investor, there's some great, great tools and tips in there. But, um, also chatting with you, um, [01:00:30] just helps illuminate more of those things. So I would encourage folks to reach out to you to have those conversations. So yeah, but thanks for joining us today. It's been great.

Michele Hammann: Awesome. Thanks for having me, Glenn. I really appreciate it.