Morgan & Westfield Deal Talk
Exclusive Interview with Carl Sheeler
There is more than one way to improve the value of your business, but it depends on how deeply you're willing to look. Learn how to do just that on this episode of “Deal Talk” with Dr. Carl Sheeler, the managing director and family office global group leader at Berkeley Research Group.
Our mission on “Deal Talk” is to bring you the information you can use to help you build your bottom line and improve your company’s value. However, as we’ve learned on the program, not all value drivers may be so apparent, and as our guest on this edition of the program will tell you, sometimes you have to dig deeply to discover those important intangible factors that could help lift your business’s value to a level you never thought possible. Join us for an insightful chat with Dr. Carl Sheeler, who discusses his unique perspective on improving value as found in his book, “Equity Value Enhancement - A Tool to Leverage Human and Financial Capital While Managing Risk.”
Key Points from our Conversation:
In order to determine the real value of your business, you need to look beyond some of the data points. You need to take it a step further.
The acronym GRRK is a useful tool: governance, relationships, risk, knowledge.
Fully utilize the business relationships that you already have. You need to feed those relationships and ask the right questions.
Don’t be deterred by an advisor’s hourly rate. The experience of that advisor may enable him or her to complete the task in a shorter amount of time than a less expensive advisor.
The risk is the number one overlooked item in a way that a business operates.
Questions answered in this show:
In order to determine the real value of your business, you need to look beyond some of the data points. You need to take it a step further.
The acronym GRRK is a useful tool: governance , relationships, risk, knowledge.
Fully utilize the business relationships that you already have. You need to feed those relationships and ask the right questions.
Don’t be deterred by an advisor’s hourly rate. The experience of that advisor may enable him or her to complete the task in a shorter amount of time than a less expensive advisor.
The risk is the number one overlooked item in a way that a business operates.
Jeff: There is more than one way to improve the value of your business, but it depends on how deeply you're willing to look. For new answers to new questions about what really drives value, you've come to the right place.
From our studio in Southern California, with guest experts from across the country and around the world, this is “Deal Talk,” brought to you by Morgan & Westfield, a nationwide leader in business sales and appraisals. Now, here's your host, Jeff Allen.
Jeff: Hello and welcome to the web's number one content source for small business owners committed to building a business for eventual sale. Here on “Deal Talk” it's our mission to provide information and guidance from our growing list of trusted experts that you and all small business owners can use to help you build your bottom line and improve your company's value.
And it's improving your value that we want to talk about today, with someone who has some different thoughts on the subject. Dr. Carl Sheeler is the managing director and family office global group leader at Berkeley Research Group. He has helped over 1,200 mid-market to mid-cap companies with their planned and unplanned transitions, transfers and transactions. He's the recipient of the Alliance of Merger and Acquisition Advisors Mid-Market Thought Leader of the Year Award for 2015. And he has written a book, “Equity Value Enhancement: A Tool to Leverage Human and Financial Capital While Managing Risk.” And the information contained in this book is what we want to talk to him about today. Dr. Carl Sheeler, welcome to “Deal Talk,” sir. It's good to have you.
Carl: It's good to be here, Jeff. I look forward to having our exchange.
I think one of the best bits of advice that I would provide is as best as you can, try to take a very unvarnished look at your business.
Jeff: Thanks so much. It's not often that we see books or they're brought to our attention that really causes us to kind of sit forward and take notice. But your book seems to suggest that to determine the real value of our companies we need to look beyond some of the data points. We need to take it a step further. What do you mean by that?
Carl: Here's an example that is simplistic, but I think is a good illustration. Somebody had a decision as an entrepreneur when they're first starting out, the build versus buy. The build would be starting from scratch. You bring money into the company and over time you hope to grow it. Whereas buy, obviously it's pre-existing and the question is, is the asking price based on the fact that you already have client's allocation, product or service, or is the value there? The reason that I bring that up is that most entrepreneurs are confronted with the fundamental question particularly during the first three to five years that they've gone over the hurdles, the risk of the business not being successful. And that hurdle is growth versus gratification.
And sometimes we'll hear the term “lifestyle business,” which basically means that even if you have a business with $5 million in annual sales if you're geared towards taking money out of the company so that you can maintain your lifestyle, I refer to that as “starving the beast.” The impact of doing so over a 20-year period of time could result in millions of dollars of lost value. And so the question then becomes, is it just the dollar driver, which is what we would think of as financial capital, or is it more of the question of human capital, which has a lot to do with the way that we act and behave, and how that influences value.
As I referenced in the book that you shared, I believe that there is an acronym that provides the overarching consideration, and that acronym is GRRK. The G is governance, and that goes to strategy, innovation and culture of the organization. And the reason I hate this example about lifestyle is that you're framing the culture, particularly if you're not reinvesting into the business, which tends to cause the majority of businesses to hit a plateau between 5 and 10 million in annual sales. The difference being is that, that one human capital aspect -- governance and strategy -- is the difference between blocking and tackling as opposed to working in the business with more of a long-term insight, less gratification upfront, more orientation towards growth, and realizing much larger value at the backend.
The R in GRRK, the first one is relationships. It's basically asking the question, are the relationships with your employees essentially more of a transactional mindset? I pay you what you're worth. As well as working with vendors and their relationships with the transactional mindset. Here's the fee for X member units of raw material, or here's your hourly rate. And that's very, very different than your client relationships, which is you're hoping that the relationship is something more than just the quality and the service because every competitor claims the exact same thing. So as you more leverage those relationships, which goes back to the cultural component, you can tease out value. Those things that both times they have to stretch so far are not financial, you won't find them on any financial statement, but guarantee to influence value, bringing us to our second R, risk as part of the GRRK.
The risk is the number one overlooked item in a way that a business operates. And what I mean by risk is not just the risk so to speak of lost profits or lost sales, but the risks associated with something as fundamental as having a buy-sell agreement with an existing partner but never having funded it and as a result of the partner’s disability, death or divorce, has a significant negative impact on the business. That would be a very simplistic example of a legal risk.
Then the last letter, K, being knowledge. Again, if I can change the name of your company with the name of a competitor and no one would know the difference, then it would be perceived that that which you're offering, whether it's a product or service, can't be differentiated. So, therefore, what is the secret sauce? And it tends to be the combination of internal and external relationships, the ability to mitigate risk and have a culture in an organization that is proactive and protects that knowledge and differentiates via a combination. And as you know, all those things deal with, the focus being on creating value, not just increase top line revenues and bottom line profits.
Jeff: Really important, I think right there, the summary, crux of importance here of the book and the message you're trying to deliver. So what's really wrong with, I guess, the idea, Dr. Sheeler, of having a job that I can make $5 million a year and I can fund the lifestyle that I need to have to be comfortable along with my family, and just simply go through my business existence with that kind of mindset?
Carl: And again, I don't condemn an entrepreneur for making that choice. I guess the fundamental question that would need to be asked is that when most entrepreneurs, particularly baby boomers are confronted with ... I've had my chance to extract money in the company, and as a result of that have a decent lifestyle. The question then becomes, what's the value of this asset of the business as a result of running it where I am the chief and the bottle washer? And therefore, then the paradigm prefers that if we're looking at a business with $5 million in annual sales based on the business reference guide and other recognized sources out there it can only stand a one in four chance of ever selling.
Jeff: OK.
Carl: The second issue is, even if it does sell, the price multiple that business will have will be traditionally relatively low. Why is that? The answer is that because the individual did not scale the business. They probably are a very key component in the business. So therefore unless they stay on for some defined amount of time, there is a significant amount of risk for the new acquirer. And as a result of that risk, the higher the risk the lower the price multiple that they're willing to pay. And more than likely the seller will also have to carry back paper. In other words, the seller provides some of the financings to mitigate the risks of the acquirer. So it's one thing, now you start looking at this from a strictly financial standpoint. So we'll use the hypothetical that the business can sell $2 million. The buyer says, "OK, I'll put up 500,000; you carry paper for the balance." That's a 75% balance, and as the seller, I'm now confronted with the capital gains tax. That gains tax is more than likely going to be approximately $400,000, assuming 20% capital gain. And that means that I am now left with the $100,000 net after the sale with no guarantee that the steady payments will come in over the ascribed period of time for the period that I am carrying that paper with that note. How's that looking for you so far?
So one of the things that we always like to emphasize is that for every dollar that you pay, if you can get $10 or even $100, possibly even more in return in the way of advice, that enhances the value.
Jeff: So far it's pretty depressing, really, when you get right down to it. So some of us can be very short-sighted in our thinking. We may think that we're right, but at the end of the day there is something that is much more significant that we need to kind of take a look at and focus on, and that is kind of that value down the line that we want to try to obtain for our business and certainly build in our business. What is it that we don't know as business owners, Dr. Carl Sheeler, that we need to understand? Where is it that we can look for these value-building tools whether they be tangible or intangible? What is it that we have to understand first in order for us to take the right step in the right direction?
Carl: I think one of the best bits of advice that I would provide is as best as you can, try to take a very unvarnished look at your business. And it's not unlike everybody looks at their kid and when they’re newborn they’re the most beautiful kid around and everybody's saying how nice that is because no one's going to say, "Jeez, that's an ugly baby." So what they could be thinking about is some of the things that are low lying fruits that sometimes you just take for granted. Here would be an example of that.
More than likely you have a bank relationship, and let's talk about the banker relationship. Is that banker there based on rates and terms? In other words, I'm your relationship manager and the reason that you bank with me is because I'm just a really nice guy. By the way, you've been banking with us for a while and you get your statements and you have a line of credit of $100,000. And that interest rate is anywhere from 7%-12%. That's not a banking relationship. That's just a transaction. How could that differ? Here's one way that that could differ, and this is low lying fruit because it won't cost you anything. You could ask the banker to take a look at your current financial statements. And say that I'm a manufacturer. Is there anything that you could recommend based on looking at my balance sheet or my profit and loss so that I can improve the way that I run my business? From the banker's perspective, obviously, one of the things they would love for you to do is perhaps take out a loan. And let's say that they identify from looking over your financials that perhaps you would produce twice the widgets in half the time by acquiring your equipment. And that would increase your profits and reduce your cost of sale, and perhaps it can reduce your labor expenses. Does that relationship take on a totally different complexion as a result of just that one example of an exchange?
Another one is as simple as I rely on various metal suppliers in order to fabricate my product. Asking the banker, "Do you work with anybody that's in the metal supply industry?" And their answer might be yes. And may I ask for some introductions? Down that pipeline on the flip side, here's the type of customers that I sell my pension products to. Do you do any banking with any of those types of individuals? If the answer is yes, I’d love an introduction. Obviously, there may be an opportunity for us to do additional business, and asking that of the banker. Finally asking that banker, "Am I the only metal fabrication business that you do banking with?" And I would imagine that that banker would say, "No, there are other fabrications, including metal fabrication businesses that I work with." "I have a question for you. Without naming any of your clients that are in my space, what are some of the things that you notice that they do that allows them to be a $10 million in annual sales, $50 million in annual sales? What are they doing differently that I could consider doing but for the fact that I only know and am insulated in my own bubble?" Now that we're not comparing my business against itself in a vacuum, is 10% year over year growth actually any good? And it's possible that you as a banker might know that the industry norm is more along the lines of 10% to 15% per year.
So these are examples of this banker communication in which there's no cost. I could go on and talk about insurance products, that you have the adequate level of coverage, that the premiums make sense, and revisiting all the possible risks in your business that at the time you first started you really didn't consider, but now that you're at 5 million, or 50 million, or what have you, are areas that if you were to mitigate that risk that would lower the risk. And as I emphasized before, whenever you lower the risk you increase the price multiple in the business. So the focus orients not just in top line sales and bottom line profit, but what's driving the value of the business. So those are some of the examples of looking at your already pre-existing relationships and looking at it from the standpoint of being a steward of value as opposed to, "This year was a good year because I was able to pull $500,000 and put it in my pocket.” My question to you is, if your sales have started to level off and your profit is going down, you might be pulling out the same amount as last year, but you're starving the beast in the process.
And so the question then becomes, is it just the dollar driver, which is what we would think of as financial capital, or is it more of the question of human capital, which has a lot to do with the way that we act and behave, and how that influences value.
Jeff: So really what we're talking about here is getting into those relationships that you may in fact already have but relationships that you need to feed. You need to feed those relationships, you need to ask the right questions and use them because chances are the benefit could be reciprocal. It can go both ways. And when you both can benefit from this relationship development that we're talking about, both sides win and you're really improving value in both directions. Dr. Carl Sheeler is with me today. He is the author of “Equity Value Enhancement: A Tool to Leverage Human and Financial Capital While Managing Risk.” My name is Jeff Allen and I'll be back with more when “Deal Talk” resumes after this.
If you'd like to share your knowledge and expertise on any subject related to selling businesses or helping business owners improve the value of their companies, we'd like to talk with you about joining us as a guest on a future edition of “Deal Talk.” Interested? Contact our host Jeff Allen directly. Just send a brief email with "I'd like to be a guest" in the subject line. In a brief message include your name, title, an area of specialty and contact information, and send it to jeff@morganandwestfield.com, that's jeff@morganandwestfield.com.
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And sometimes we'll hear the term ‘lifestyle business,’ which basically means that even if you have a business with $5 million in annual sales, if you're geared towards taking money out of the company so that you can maintain your lifestyle, I refer to that as ‘starving the beast.’
Jeff: I'm Jeff Allen with Dr. Carl Sheeler. He's managing director and family office global group leader at Berkeley Research Group. He's the author of “Equity Value Enhancement: A Tool to Leverage Human and Financial Capital While Managing Risk.” Really what it does right off the bat is it lets you understand that there is more to valuations and more to understanding how to improve the value of your business. We're kind of digging a little bit more deeply into some of the value drivers that maybe you're not aware of or maybe you're not accustomed to. I'd like to talk to you about the importance of working with trusted advisors, what do we have to do, the questions that we have to ask in order to find the people who have the best interest at heart when trying to determine those key value drivers that will help us enhance our company's value?
Carl: It's actually a very insightful question, Jeff, and one of the simplest things that we have a tendency to do when we're confronted with the question of what does good look like is it goes through the unit in which we mostly understand. What I mean by that is that if you're rendering fee for services, such as an accountant or attorney, what a lot of people will look at is what's your hourly rate. Unfortunately, that does not necessarily equate to capability without having other types of metrics. So as an example, if you have an attorney that specializes in a particular industry or niche, or can provide references of services that they have rendered to other individuals in your space, you can get a sense of whether they kind of get you and get some of the challenges that you might be confronting. Another one is what I would call the self-inflicted “it costs too much mode.” And that's looking at a trusted advisor and saying, "Your hourly rate's really, really high. I don't want to pay that." But what you may be paying for is 25 years of experience. That it’s not the amount that you charge per hour, it’s the number of hours that are charged. So if I've got 25 years of experience and I'm charging $500 an hour, but I'm able to address whatever issue it is in 10 hours as opposed to somebody that's charging half of that but it takes them 30 hours, I've spent 50% more because 30 x 250 being $7,500 as opposed to the $500 an hour at 10 hours, $5,000. It's not enough to simply say what your hourly rate is, because as I tried to illustrate, skill set certainly comes into play. I also use the term “proactive.”
And so using the accountant as the example, if the accountant is essentially filling out tax returns and doing some form of compiled or reviewed financial statement, that's still reactive. If they were to say, "Hey, I've noticed that your profits seem to be declining. We should probably get this together and talk about it." And you as the owner are saying to yourself, "Oh jeez, what's that going to cost me?" The question becomes the cost versus benefit. So one of the things that we always like to emphasize is that for every dollar that you pay if you can get $10 or even $100, possibly even more in return in the way of advice, that enhances the value. I'm not sure about most people that are the listeners, but I would be more than happy to receive $100 for every dollar I invest. And so that becomes part of the paradigm.
The other thing that we express in that chapter is there's a whole myriad of advisors out there such as the type of advisor that specializes in family businesses, when you have multiple family members that might be involved in the business. Some perhaps making great contributions, maybe others not so. And they may ask you the question, "Hey, I know you love your son-in-law, but as the vice president of sales, you’ve had some pretty high turnover, which perhaps is impacting your overall revenues for the organization. And coupled by, it might be having an impact on the overall value." So if you think of your son-in-law as it keeps your daughter happy and you're paying them a salary of $150,000 but they're not creating any value, which is costing you one and a half million or 50 million, do you love them that much? That becomes part of the overall, which advisor is going to tell you what you need to hear, or which advisor is perfectly happy to receive pay for a service and is that the best business model that you're applying?
As I express in the chapter there's over 30 different advisors that from time to time you're going to come across. And you probably want to know what is that good looks like. And making an investment of time in particularly what I would call your most trusted advisors, those types of individuals that you're going to keep on a short leash and on a regular basis have questions on how they can help you grow your business. And if they can't, they may not be the advisors that are right for you. Particularly if you're growing, you might outgrow them.
Jeff: Excellent thoughts, Dr. Sheeler, and already we're running out of time. Your book, which is available should people want to look for it, they could probably find it very easily on barnesandnoble.com, and you'll want to go and check it out, by the way, also to at carlsheeler.com. The proceeds from the book, all net proceeds, etc., are donated to an organization called Two Bears Ranch. I know that that's important to you.
Carl: Thank you for the privilege of doing so. I appreciate it, Jeff. The author, myself, as well as my wife, are both veterans of the Marine Corps, and we recognize that given the fact that we did not have a draft this past decade where we've had hundreds of thousands of servicemen in Iraq and Afghanistan, many of them had multiple deployments and are impacted by what's called post-traumatic stress disorder, which is, the best way to think of it is if you're constantly situationally aware that you never have a respite because somebody's trying to kill you. And that goes on day after day, week after week, month after month, and then year after year. You can't be right and experience that all the time without having an impact on your psyche. So what Two Bears Ranch design is it providing what's called equine therapy, think of it as a horse whisperer. The ability to convince a half-ton animal to respond to you in a way other than using physical force. And as a result of that, there's a transference between you as you're trying to resolve some of your inner struggles while also mastering how to do that with your interaction with a horse. And it's a recognized and highly regarded means to, in a safer environment, to be able to do that with other fellow servicemen that are also trying to overcome post-traumatic stress disorder.
If your sales have started to level off and your profit is going down, you might be pulling out the same amount as last year, but you're starving the beast in the process.
Jeff: Dr. Carl Sheeler, we appreciate your time. We enjoyed this discussion. He's a strategic value architect. He is the author of “Equity Value Enhancement: A Tool to Leverage Human and Financial Capital While Managing Risk.” Again, thank you for joining us today Dr. Sheeler. We hope to have you back on again and perhaps at some point in the near future.
Carl: Thank you, Jeff. It was a real pleasure.
Jeff: Tell a friend about “Deal Talk,” won't you? In addition to morganandwestfield.com you can find us on iTunes, Stitcher, and Libsyn. “Deal Talk” has been brought to you by Morgan & Westfield, a nationwide leader in business sales and appraisals. Learn more at morganandwestfield.com. My name is Jeff Allen. Until next time, thanks so much for listening, we'll talk to you again.
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Carl Sheeler's Bio
Carl Sheeler, Ph.D., ASA
2200 Powell Street Suite 1200 Emeryville, California 94608
(424) 253-0100
http://www.thinkbrg.com/
csheeler@brg-expert.com
Dr. Carl Sheeler brings wisdom gained from his 25 years of litigation expertise coupled with his corporate governance, business/military operations, strategic planning, finance, and academic background to address complex risk measurement, management, and mitigation issues.
Dr. Sheeler’s court/IRS qualified litigation and public and private equity/enterprise valuation expertise includes testimony on numerous breach of duty, damages/diminution of value/lost income, class action, dissenting/oppression shareholder, partner, and tax authority disputes. Industry clients include defense contractors, manufacturers, transportation, technology, professional and business services, as well as asset holding companies (holding esoteric assets ranging from funds, intellectual, real, and personal property as other alternative and traditional assets). He has testified on 165 occasions and opened on value/damages matters on more than 1,000 engagements.
His public and private company experience includes family business/office valuation and advisory services associated with intergenerational planning, equity transfers with estate and gift tax issues, as well as partial and full liquidity event options and disruptions.
Dr. Sheeler distil complex issues and relevant facts into opinions and advice that is understandable to the non-expert and which may be applied by boards, founders, executives, and their trusted advisors in a transfer, tax, and transactional matters. He is an authority on trust and estate and ESOP valuation issues such as how agreement provisions, asset allocation, and holding periods associated with equity ownership in asset holding and operating companies influence risk. This unique set of skills allows him to consider the factors and impairments as they relate to investor-proposed "discounts" associated with equity ownership.
He is a national thought-leader on identifying and quantifying risks and how intangible assets create, enhance, and diminish value. He has written and presented more than 300 treatises on valuation, merger, acquisition, divestiture, and litigation-related matters. He serves on two national valuation boards and is authoring a Value Creation treatise for John Wiley & Sons.
Education:
Union Institute and University (Cincinnati, Ohio)
Ph.D., Finance, 2003
Command & Staff War College (Quantico, Virginia)
M.S., Operations Management, 1985
University of Illinois
B.A., Business/Industrial Psychology, 1981
Employment History:
Business Valuations Ltd. - East/Allison Appraisals & Assessments, Inc.
Managing partner
1992 - present
Privatus CI3O LLC
Co-founder
2011 – present
National Association of Certified Valuation Analysts
Instructor
2000 - present
Point Loma Nazarene University, Fermanian School of Business
Adjunct professor
2008
Bryant University
Adjunct professor
2004 – 2005
American Automobile Association
Manager, Corporate Planning and Executive Development
1988 - 1990
Abbot Laboratories
Territory manager, Diagnostic division
1985 – 1987
U.S. Marine Corps
Combat, staff, and training officer (active duty and reserves)
1982 - 1992
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