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Guests: Chris Ray and Chariss Tatman of C2 Group.
Host: Kevin Mako, founder of Product Startup and the leading expert in hardware startup consulting. A hardware entrepreneur since 1999, Kevin has advised more than 1,500 founders and built and scaled MAKO Invent through its acquisition by TriMech in 2024.
Preparing a Small Business for a Cleaner Sale
Chris Ray and Chariss Tatman discuss the financial, legal, and human-resources issues that can complicate the purchase or sale of a small business. They cover recurring expenses, perishable inventory, owner motivations, and the operational details that buyers may examine more closely than expected.
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Filip Valica: Hey, everyone. Welcome to the Product Startup Podcast, a podcast that helps bring your product idea to life by chatting with successful inventors, product designers, and other industry professionals.
Filip Valica: This podcast is run by Mako Design + Invent, and hosted by Filip Valica. Our goal here is to get to the bottom of what makes a product successful, from initial idea to putting your product on the shelf. We're taking you step by step to build a functional product and scale your product business. Now onto the show.
Filip Valica: Product Startup, Episode 47, Chris Ray and Chariss Tatman with C-squared consulting, talk about some the financial, legal, and HR traps of buying and selling small businesses.
Filip Valica: Hi, everyone, and welcome to the product startup podcast, where we talk about turning ideas into successful products step by step. I'm Filip Valica, and thanks for listening today. In the last episode, we talked with Stephanie Cummings and Tal Berke about designing,
Filip Valica: sourcing, and manufacturing the schlocker, a shower locker designed for anyone sharing a bathroom. So make sure to check out episode 46 if you want to hear what it took to bring that product to market.
Filip Valica: Before we get started, I wanted to give a huge thank you to everyone that participated in the 2017, the Product Startup Audience Survey and Giveaway. I'm going to notify the Grand Prize winner this week.
Filip Valica: Also, everyone who took the survey will get a mini case study with what worked and what didn't work during the survey. Hopefully you can apply that when validating your own products and businesses. I can't tell you enough about how much I value your feedback.
Filip Valica: I estimate that I have about 5 to 600 subscribers of the podcast with 5 to 8,000 months. downloads depending on the month. The website sees about 1,700 monthly visitors with 3,600 page
Filip Valica: views. So despite all those listens and downloads, only 16 of you responded. And for that reason, I'm going to focus on your survey feedback and create content specifically for you. The challenge
Filip Valica: that I have ahead of me is that the responses were not statistically significant, meaning one answer could swing the result 6% just on its own. This also means that it's much harder to see trends in the data, I almost have 16 different people to focus on.
Filip Valica: All that said, I really appreciate your time, and I will definitely be using your feedback to make the product startup better. As a consolation prize, to the 15 of you that will not win a grand prize, I'll be sending
Filip Valica: you a link to schedule 30 minutes of one-on-one time with me as a thank you for your help. Just like any client I work with, we will use that time to power through any problems you may be having with your product or business.
Filip Valica: So be on the lookout for an email for me this week for more details. One of the takeaways that I got from the survey was that many people want a place to collaborate and meet other product creators who are developing or have already launched their own products.
Filip Valica: So this week, I've created the Product Startup Workshop, a private Facebook group where I hope to see you and hear from you between the podcast.
Filip Valica: Just go to the Product Startup.com slash group or search for the Product Startup Workshop on Facebook to
Guests: join. So thanks again for your help with the survey.
Filip Valica: And now let's get started with the show.
Filip Valica: Hi, Chris and Chariss. Thanks for joining me on the show today. Yeah, thanks for having us. Yeah. Hey, how's it going? So I'm really excited to have you on. When I saw your post on Reddit, I thought, man, we really need to sit down and have a conversation because you were talking about how
Filip Valica: you help companies get ready for outside investment and prepare them even for sale. Talk a little
Guests: a little bit about your experience, Chris, in law and accounting and how that kind of intersects. And, Chariss, your experience with HR. Sure, so I guess I'll go first. So, you know, you reference the post on Reddit that sort of got your attention.
Guests: That was sort of representative of a lot of the work that I do where I was just having a not a frustrating experience, but where I've been working with a client of mine, a small business that just sells exotic imported Yerba Mata.
Guests: on the internet. And I was just having a very hard time convincing the principle of that business to take their accounting more seriously. As you mentioned, I sort of started off my career in law.
Guests: I come from the world of general counsel, but I've since moved over to helping small to mid-sized businesses both get ready for outside investment. I'm actually seeking to acquire outside investment.
Guests: And one thing that I really try to stress to small businesses is that if you're dealing with a savvy investor,
Guests: they are ready to go over your books with a fine-tooth comb, and they know things about how to value your business that you really don't know about. They know how to look for where money might have gone in places that you didn't want it to
Guests: go. They know how to spot, you know, quirks and oddities in your books. And like I mentioned on that post, this was a case where I was actually able to help a small business secure a much
Guests: higher valuation than they had actually, they had gone into their investor negotiation thinking they could get without doing anything for their business, just by doing things to get their
Guests: books in order, just to make their numbers cleaner, to categorize their books in different ways, to book writing you in different ways, that kind of thing. And it's one of the things that I'm really passionate about because it's one of those
Guests: things where accounting is part of running your business that most people do very badly. Most people don't care about it until it's too late, but it's also a skill that can be learned very quickly, that can be learned very cheaply, and where there are tons of resources
Guests: out there in the world to help people get those processes in order. And Chariss? Yeah, and sort of like Chris Fed with human resources, it's really sort of the same thing.
Guests: It's one of those things that people don't really think about, especially as smaller companies and especially as starting up, that is not really at the top of the price.
Filip Valica: list. But once you start talking to investors, it really becomes important how your employees view your management team and, you know, sort of other things like that that your investors
Filip Valica: are going to be looking at. Why don't we start at the beginning a little bit? I am a small business owner and I might be using a CPA already. So everything seems to be humming along
Filip Valica: okay. For whatever reason I decide to sell, what are the some of the typical reasons that people
Guests: want to sell, right? They want to get some investment maybe in their business. business because they want to expand or maybe they want to move into a different business or maybe unfortunately something happens with the family and they need a divest for the family business what other things have you seen before so you really want someone goes to seek an
Guests: outside investment because that's the point where they want to withstand you know that we in my head I sort of divide businesses into the phases of their own investments where you know you have your first round which is just your your own money goes into the business that maybe you do a friends
Guests: family round and then when you're at the point where you're seeking a serious investment um usually it's just because you have either finished your beta testing or you've identified a market that
Guests: you can grow into with enough marketing resources or you're just at the point where a new outside investment is going to help you just grow, grow, grow, right? So that's sort of the dominant reason that I've seen with the businesses that I work with. But oftentimes it's, as
Guests: you say, it's for other reasons. People just want to cash out and go on vacation or they have a sudden need for a capital injection that's unrelated for business. There's a family emergency. There's a health emergency, they need to move, that kind of thing. Or sometimes they just want to exit
Guests: because they've grown the business as far as they can, and they just don't have time to grow anymore. And they don't want to see their baby just get liquidated. They want to have
Guests: somebody invest with enough paid in capital to go hire a general manager or to put it in the hands of a management group that can just take it, take the ball and run all the way down
Guests: the field with it, so to speak. But besides that, you know, those are really the main reason that people are seeking investment. I think that one mistake a lot of entrepreneurs make is that they view investment for
Guests: investment's sake just as a good thing, right? That if they can get a check for a million dollars or whatever, they'll sell off any size slice of their business they want to. You know, I've dealt with clients where when they get those dollar signs in their eyes,
Guests: it is very hard to convince them to walk away from an offer of $500,000 or a million dollars or more because they just, they get hooked on the idea that they can spend that money
Guests: however they want, not quite understanding that taking on an investor can often mean that now you're accountable to somebody else on the outside, that taking on an investor is sort of the entrepreneurial equivalent of getting a boss in a lot of cases.
Guests: So if you are a business out there and you're thinking about taking on an investor, I want you to really think about the reasons that you want to do it. You know, if it's an emergency need, that's one thing.
Filip Valica: but if it's capital in for the sake of getting capital because somebody pulls you to take as much money as you can from wherever you can get it, just think very carefully.
Guests: The third of your life's dream, 49% of your life's dream, that's a lot of your life's dream, even for what can seem like a lot of money.
Guests: And, Chariss, what about the HR impact of taking on an investor or maybe taking on some people that you haven't really done enough business with to know where they stand on some things? Yeah. I mean, that's a really great point. As far as HR goes,
Filip Valica: from what I have seen, investors are not generally, once they have invested, are not generally making HR the priority. They're more interested in the financial aspects of it.
Filip Valica: But obviously, if there are issues within the HR department, they're going to take a more vocal interest in that.
Guests: Let's say the business owner goes out and start shopping the business around because they, for whatever reason, they need that injection and they're looking for an investor. They're already using a CPA. They think they have their books in order.
Guests: What are some of the typical issues that that company might run into that it's really hard to spot or someone might be blindsided by? So I think that one of the first things I'll say is that if you are using the CPA to help you with their bookkeeping, that's great.
Guests: You know, that puts you ahead of a lot of people. I would really try to make sure that, you know, that your CPA is a partner,
Guests: that your CPA is in your office, they can see your operation, and they understand how everything is going, because a lot of the time if someone has an outside accounting resource, it's a
Guests: matter of, you know, your bank statement or your credit card processor will sync directly with an outside accounting firm, and they may not necessarily understand what every transaction is about.
Guests: For example, I've seen, I'm working with a client right now where they've had a substantial number of items that their CPA put on their books as non -recurring or as special expenses, right?
Guests: That's usually the real trap categories or special expenses where, you know, someone says, well, this was like a one-off equipment purchase. This piece of equipment will last me for 20 years. I don't need to worry about it anymore.
Guests: We book it as a special expense and depreciate it as a special expense, except that every, you know, every year, like clockwork, that new specials, so-called non-recurring expense shows up. And at a certain point, you have to think, well, maybe this really is a recurring expense.
Guests: Like we both, Sharise and I were working with a pretty large client a couple of years ago who was on a mergers and acquisitions screen. They were just rolling up brick-and-mortar dealerships left and right, and they were booking
Guests: all of their acquisitions at the non-recurring expense, except that if you do a mergers or an acquisition, every six month like clockwork, you're not booking that correctly, but it's a non-recurring expense as part of your business.
Guests: But besides that, there's really, I think that's a bigger concern, especially for the people that listen to this podcast who are selling physical products, as people who sell perishable products.
Guests: If you have inventory on your shelves that has a shelf life, your CPA may not even know or understand what the shelf life of your product looks like.
Guests: And that's a very different accounting strategy than if I'm selling refrigerators and they can just sit in a warehouse somewhere. If I'm selling like a perishable food product, for example,
Guests: or another example is I work with some marijuana dispensaries. They have a perishable inventory, right?
Guests: So the way that you book your inventory, you need to have these very special calculating tools to help you value your inventory, because it's not as simple as just your inventory can be
Guests: books with either the retail value or the purchase price of that inventory. You have to account for the fact that your inventory is rotting every day that it doesn't sell.
Guests: But there's a discount that an investor is going to want to apply onto your inventory column when they're examining your books. And so that can be kind of a nasty surprise for a small business person who thinks that they've got a great valuation on their business.
Guests: And then an investor comes back and says, I need a 25% premium on your inventory because your inventory has a shelf life. And that can really blindsize some people, and it can really hurt the value that people think that their business has had in the first place.
Guests: Those I think are two really big categories where people should look.
Filip Valica: But there's always lots of little things, you know, things you might have forgotten about. there's receipts in a shoebox from your startup days or just things that you've forgotten about that your CPA never saw so you know if you're at that point you really need to be
Filip Valica: doing things like an internal audit like a top to bottom internal audit third party audits that that kind of thing just to make sure that all those things that not even your CPA might think about get caught in the first place yeah so those are all good points you know it sometimes
Filip Valica: it can seem a bit daunting for a small business that might have five employees right doesn't have dedicated accounting staff to have to go through a lot of these checks because at the end of the day you trust your CPA and yeah you might have a decent understanding of how accounting works
Guests: but that you expect them to be the expert in it right you've gone through this process with other small businesses you said that you get them ready for investors to come in what are some of the other steps that people have to take you know in addition to making sure that the expenses are
Guests: categorized properly and that the value of the business is as accurate or at least based on what investors expect. What are some of the things that investors look for when it comes to valuations? Sure.
Guests: So, you know, usually, you know, there's, there are very standard valuation method that investors will use,
Guests: most, most industries sort of have just a known quantity that's like an industry-specific sales multiple or some multiple of your free cash flows. And those will vary from industry to the industry.
Guests: But I think that, you know, one thing that especially, Sharisa's scene is that investors typically are actually smarter than people think they are. Unless you're lucky enough to have roped in, like,
Guests: the recently very wealthy person who's in over their head even more than the small business person is, they can comb through processes in ways that you don't even understand. You as a business owner, for example,
Guests: did you know that there are investors who have calculating tools or how well your turnover rate impacts your payroll number, that they can do trendlines on your payroll number based on the kind of people that you hire and fired
Guests: that you didn't even know existed, that there really are not a lot of places in your business where a savvy investor can't find ways to poke holes in your evaluation, because that's usually where an investor conversation begins.
Guests: It's with your justification, your justified evaluation of your own business, And where the investor is coming from is they want to knock down that valuation as much as possible
Guests: because they want the biggest premium they can on whatever stake or whatever investment or loan they end up making. So when they're looking for ways to knock down that valuation, they will be looking at those unexpected places.
Guests: You know, do you have high turnover in a very expensive part of the labor market, like developers, like high-end marketing people, like attorneys, that kind of thing?
Guests: I've worked with law firms before, where your staff is by far your largest expense, and lawyers who are good of their jobs are very hard to find, very expensive,
Guests: and, you know, firm owners get blindsided because someone's running an analysis on their turnover rate when they didn't even know that was on the table in the first place, that if part of the value of your business comes from your staff,
Guests: they're going to be looking at how well you retain your staff and how well compensated your staff really is.
Filip Valica: And that could be kind of heartbreaking in the other way where if an investor comes in, it says, you know, this person who's been your friend since middle school, who was there since day one, is just too expensive, you know,
Filip Valica: who would you fire for a million dollars or who would you ask to take a pay cut for that outside investment? So, you know, things like that, like I've really detailed look at your HR processes before you get that investor in the door, we think it can be really helpful to help
Filip Valica: you not get blindsided and to make sure that you can justify every penny of that valuation that you go to an investor with. Yeah, it sounds like it could be pretty complicated, especially since in my experience,
Guests: a lot of the investors come in and they tend to specialize in certain types of businesses. And so, like you said, they've got in their mind, they've got an idea of what specific ratio should be, what your, you know, what your conversion rate should be for your leads
Guests: when you're out there, you know, sourcing sales or maybe what your material cost should be if you're in a particular product-based business. And so they have their own kind of ranges and they just kind of do a really quick check against your books.
Guests: Is there something where small business owners can go online or use some sort of a resource to see if their expenses are in line with industry norms? Sure. Most industries that have their own industry groups,
Guests: you can usually find either calculators or pre-built Excel spreadsheets that will help you walk through that.
Guests: One thing that I'd recommend for everybody is just go to your local library or go online and find a PDF and just get a really basic level accounting textbook. This is something that I have done just find like an intro to accounting textbook.
Guests: And as you're reading it, think about the things that apply specifically to your industry. For example, if you're running a product-based startup, different methods of valuing and depreciating things like inventory will be very important to you.
Guests: And no matter what you're in, whether you sell solar panels or you sell refrigerators or you sell cars, there are industry groups out there that would be more than happy to supply you with the tools that they would like to use to value an investment.
Guests: And if worse comes to worse, and you're shopping for an investor already, ask your investor. You know, part of one of the things that people sort of forget about when if you are on the point of negotiating with an investor is that it doesn't have to be an adversarial relationship.
Guests: You know, your investor can be a partner for you. You know, as you say, if you have a partner who is very interested in your lead conversion
Filip Valica: rate, talk to your investor and say, you know, if I bring you on board, how are you going to help me to improve my conversion rate? What is your expertise? What is your knowledge of the industry bring to the table?
Filip Valica: And in that way, you sort of turn around the negotiation on the investor and make it as much about their value proposition about your own. really the best place to start industry groups, just dedicated industry groups, even if you're not a member,
Filip Valica: these groups will supply you with information that you can find, or you can always just
Guests: send us a quick message if you will find one for you because these tools exist and they are very helpful. Yeah, and you brought up a good point. You know, you need to look at the whole package, what an investor is bringing. It's not just about the money that they're bringing. They need to
Guests: be bringing something else to help grow the business. Either they've got connections or they can open other doors for you or they're going to get you in another part of the market that you really need to be and to grow. It's not just about the money. Right. So where's a good place for
Guests: people to find investors like that? If they, you know, if they're looking to go shop their business around, you just don't put an ad out in the paper that says we're looking for investment. Right. Sure. Yeah, this is definitely, I think that a lot of people think that it's harder
Guests: than it actually is to find investors because I think that a lot of people do it in the wrong way. first started out trying to get businesses in front of investors,
Guests: I would basically just send like online contact forms to VC groups or private equity groups and they would just vanish down a black hole and they would just be gone, right? Which is not a good way to go about it. You have to get physically in front of people and talk to them.
Guests: If you are fortunate enough to be in a town like Denver or San Francisco or Boston or Austin, where there are already thriving startup communities.
Guests: Look for things like events that are put on by accelerators. Look for things like pitch contests.
Guests: Just look for places where small business people hang out because those are also the same places that investors and their agents or their scouts hang out in.
Guests: That being said, you know, if you have found a venture capital group online somewhere that you think is just a perfect fit for you, you know, use the online contact form. and give them a call, send them an email.
Guests: But don't be afraid to just go down to these places and ask to set up a meeting. Just get your foot in the door and talk to people. It definitely is on the higher end of hustling, for sure. Now, you have to be ready at a moment's notice to give a pitch to somebody.
Guests: You never know if you're going to some pitch battle, and it just so happens that someone in the audience is there because they've got $10 million and they're hungry to spend it. You just have to be ready all the time.
Guests: Your pitch, you need to be able to do your pitch without your slide deck. You have to be able to elevator pitch your entire business, which can sound a little bit daunting.
Guests: But if you have that ready, just you got to pound the pavement and you got to go to every small business event you can find and network intelligently.
Guests: You know, don't just go meet people who are looking for a job or other people in your industry who are competing for the same outside capital dollars.
Guests: You know, you have to do your research and find out, you know, this friend of mine who I heard about just got their major funding, where did they go? How did they get
Guests: in there? If they're in my same industry, you know, what was the multiple that their investors will look for? What items on my balance sheet? Should I worry about that? You have to
Filip Valica: be just doing intelligence on your own community constantly. And it can be very daunting. I have worked with businesses that have been shopping for investors for over a year for coming up on two years, and it is a little bit difficult. But you
Filip Valica: you do it intelligently and your business is really ready for prime time, those people will show up, you will be able to find them, especially if your business makes a big media splash.
Guests: The big media splash is the best contact point for investors you can get because investors like to think that your business is hitting its stride, that it's, they can get right in at that
Guests: point where you're hitting your big part of your growth curve, and they will come to you if you make a big enough splash. The long story short, it's a hustle. It can be quite a hustle. Yeah, and when we talk with small business owners here on the show about doing marketing,
Guests: for example, focusing on PR and local news and local papers and local magazines is usually the best place to start because they definitely want to feature local small businesses. I imagine investors are kind of the same way, right?
Guests: They want to stay in the same area and meet people face to face and they tend to invest in businesses there within driving distance, I imagine? Yeah, I mean, that's always a great strategy, you know, for the reasons that you mentioned,
Guests: number one, it's often cheaper to advertise locally because people love to give, you know, discounted exposure to local businesses also because no matter what, you should want an investor
Filip Valica: to come check out your business. You know, you should want your investor in the office, seeing your facilities, looking at your equipment, just having that tactile physical experience where you can really tell your
Guests: story is it should be just as important to you as it is to investors, or it really should be. If you're fortunate enough to be in an area like a large city where you're likely to have a community of that kind, that's the best place to start.
Guests: Just people who you can call them up and say, we'd love to get you coffee, buy your dinner, take you down to the office, show you what's up. That's the best place to start because if you go shopping around, if you are just sending
Guests: letters of interest off to, you know, Goldman Sachs or Deloitte or whatever, best of luck to you, you're going to be at that all day. But if you can get somebody in your office and tell them your story, give them your emotional pitch, way better way to go about it.
Guests: Yeah, so in a way, it's kind of like getting customers, right? Customers aren't ready to buy until sometimes they see the product and touch it and get to use it and they have an emotional connection to it. Exactly. Yeah, absolutely.
Guests: And from my HR background, I sort of treat it as a recruiting experience because I have a
Filip Valica: background in recruiting.
Filip Valica: So, you know, I mean, this is the most important person. and that you're going to be hiring for your business for the foreseeable future. So if you sort of treat it as a recruitment effort, that can really help give you some focus.
Filip Valica: Yeah, and just to piggyback on that really quick, I think that beneficiaries take a great point because, you know,
Guests: it's maybe going back to an earlier point, it can be hard to be skeptical of your investors because in a way you just want as much money as you can get. But, you know, as you've said, Philip, you know, there's want to make sure that your investor has a value ad for your business, you know,
Guests: someone wants to give you a big chunk of change and be a silent partner and then just go away. You know, that can be helpful. But if they can bring connections and leads into your business, then they're already paying for the seat at the table.
Guests: You know, so you really want the investor physically present with you so that you can vet them just as hard as they vet you. I would definitely want to talk a little bit more about that. But before we get into that, Charisse, I wanted to ask you, you talked about hiring practices
Filip Valica: a little bit and how the investor might be the most important person you hire. What are some issues that you've seen with small business owners hiring employees that just doesn't really work out for the small business or that could lead to some issues down the road?
Filip Valica: You know, that happens all the time with small businesses. There are people that have never hired before, have never managed before. I think the most important thing to remember with that is documentation. And nobody's going to like to hear that because it's not a fun thing.
Filip Valica: But even if it's just an email, you know, that is explaining.
Guests: that the employee is not doing well in whatever area,
Filip Valica: as long as you're writing it down and, you know, just throwing it in that employee's file for future reference,
Guests: then you're really going to have something to look back on that is more concrete than just, you know, your behavior is not up to standard. You're going to have real examples to show them in that situation. Yeah, and I used to be an engineering manager,
Guests: had about a team of 10, two different companies I worked at, And I would say in both cases where we had problems with personnel, it was kind of the same story where you have to bring them in, have a conversation about formance or whatever the issue is, document it.
Guests: Even though we live in Texas and Texas is an at-will state where supposedly you can lose your job at any point, how does that work? even though technically people can leave work for whatever reason it seems like employers
Filip Valica: technically they can't sever the employment agreement unless there's documented issues of underperformance I mean they can it's just a very risky way to go about it just because someone can bring a counter lawsuit against you to say that you're
Filip Valica: discriminating against me for whatever reason right right at that point it's you know your word against theirs and so if you have that documentation to back up that these were not just
Filip Valica: you know, frivolous things that the employee was doing. There are real documented conversations that you've had with that employee, had with other employees in the company, other managers, whatever the situation is,
Guests: that can really show that the behaviors and not just, you know, someone's attitude because I do see that a lot. You know, I just don't like this person's attitude. They're not the right fit for the company. And those sort of answers are not going to get you very far.
Guests: You really need to have documented behaviors written down that you can sort of back up your story with. All good points.
Guests: So, Chris, earlier when you were talking about once we find an investor and we have a chance to sit down with them and we figure out that they're a match, you know, and we've done our pitch. And by the way, let's talk about the pitch really quick.
Guests: Like you said, you've got an elevator pitch where it's a two minute, three minute pitch. And if you go up in front of investors, sometimes it can be an eight or ten minute pitch, I suppose. What are the essential components that people always want to know about?
Guests: I know we always want to talk about what the problem the business is solving, how they're solving it uniquely, how they fit in the market, where are the competitors, what's your market strategy, what's the team comprised of, those types of things, how do the financials look
Guests: like? Are there any other essential things that you need to include in the pitch? Those are all great points that if you're going to be doing a pitch deck or anything, all of those things should be included to some degree.
Guests: maybe just to clarify one of those points, part of your pitch should be, you know, why is this team or why am I the best person or the best team to solve this problem?
Guests: I think that small business people and entrepreneurs should not be shy about their own credentials and about their own history.
Guests: You know, don't be, don't be embarrassed to say things like, you know, I had this full-time job as an engineer, which made me a perfect fit for this market or gave me the expertise and the credentials that I need to.
Guests: to do this. Or why you ask, is it that an engineer is out solving this HR-related problem? You know, well, it's because I have done all this private research in my own time.
Guests: You know, you should really be ready to explain to an investor why you personally are the right leadership fit for this problem and why your team is the best fit for that problem. But also, you know,
Guests: there's a lot more that an investor is going to want to know about your financials than you might know. You should have things like, like what is your EBITA, you know, just off the top of your head, you know, what is your cash flow growth off the top of your
Guests: head? You know, what is your free cash flow like? And then, you know, most importantly, I think, is that when it comes time to look at your projections, projections are usually the part of the
Guests: presentation where reality just goes completely out the window and everyone is chuckling a little bit because, you know, you lost a million dollars this year. Next year, you're going to make $100 million and it's completely made up.
Guests: Make sure that your projections are based on things that you could actually show.
Filip Valica: Here is how big our pipeline is. Here's the rate our pipeline grows. Here's the percentage of our pipeline that can burst. Here's the rate that percentage is growing at. Just boom, boom, boom.
Filip Valica: There's very quick numbers that if you have them in a good, succinct summary format are just very impressive. If everybody came to their pitch where they could be just as passionate about, you know, the rate at which their top line revenue and the,
Filip Valica: their cogs are diverging as they were passionate about their product story and their business
Guests: story, you're doing great. You're in great territory there. But besides that, you know, a picture and have all those kind of elements. You should be ready to tell your story. But like I said, I really encourage your listeners to focus on, you know, especially if you're
Guests: in a space where your product might be a highly commoditized product or a product that's very similar to other products or that could be ripped off very easily. You need to be able to explain why your team is the best.
Guests: team really hammer home, your own credentials, your own sales figures, and why you and every member of your team is a passionate, well-educated, well-equipped member of that team.
Guests: Yeah, and Chris, you talked about EBITDA really quick, and that's earnings before interest, taxes, depreciation, and amortization for anybody that is not aware of it. And they do have some industry averages, depending on the type of business that you're running, it can range
Guests: anywhere from, you know, a couple percent, I guess, all the way up to, I've seen 25 percent.
Guests: That's also another number, I guess, to go look up and see if you're in the right ballpark. Would you say that's a good indicator of your business health if you're EBITDAs within the range of the norms for your industry? Yeah, and, you know, whether that's expressed as a percentage or just sort of, you know,
Guests: like one very quick and dirty way to get a very comparable number is just your top line revenue minus your costs, minus your payroll, or minus your cost of goods sold, minus your payroll,
Guests: just to get a very, very quick number. And, you know, one reason that I think that that is a great indicator for the health of your business is because it's such a good relative comparator for how much your cost of goods
Guests: sold and your payroll and your other expenses really is taking out of your business. Like, when you look at the difference between your EBITA and your actual P&L, your income statement, that's a really good guide to how much more efficient your business
Guests: could become, right? Where if you look at the difference that you get between your top line revenue and your Cogs payroll and other, that just gives you a good feel for if you take your top line
Guests: revenue as the sealing of your business's income, then that tells you that there's money to be made just by winnowing down those other categories, you know, that maybe if I go
Guests: back and I beat up my suppliers and I get an extra 10 and 5 on the goods that I'm buying, here's the actual, this is a very quick path to how that action will affect my bottom line.
Filip Valica: Or maybe it tells you that if I get a great rate on my rent for next year, or if I start depreciating my equipment at a faster rate, I can actually just turn that into more money
Guests: in my bottom line without doing anything. Without selling a single more widget, I can show more money coming into my books just by looking very carefully at that even a number that gets that spits out of your calculator versus your actual P&L.
Guests: It just, it gives you the pathways to where the efficiencies can be, you know, on your, on your, your, uh, your balance sheet. And I'll also say right now that you can't see it, but I'm talking very animatedly with my hands right now.
Guests: Like, I'm drawing a balance sheet with my hands and so it's like, this is, this is the part of the business that I get most excited about because it's kind of like magic, you know,
Guests: Like, you know, if you just look at your EBIT number and compare it against your P&L, like, you can just start moving stuff around and really figure out where your priorities are
Guests: that I have the most money to be made by hammering this supplier or by reducing my turnover in this department, or by getting a better rate or just by doing this on a PPC strategy.
Guests: It's just, it's a very quick and dirty way to find where your biggest cost centers are when it comes down to. These are a lot of the same services that you do for small businesses, is that right?
Guests: So if someone were to contract you for help, what are some of the services that you offer to help them either get ready for sale or to prep them for a launch or additional growth, maybe? Sure. So this bookkeeping aspect of it is certainly one that we do a lot.
Guests: We work with companies, CPAs, and with their owners directly to, you know, make sure that all their numbers are in the right place, that their numbers are clean, the numbers are accurate and honest because if your numbers are inaccurate, your investor will notice it.
Guests: If your numbers are dishonest, your investor will notice it and walk away. But we also just do a do top-down audits of your company, all of your back-end processes. We really specialize in the under-the-hood stuff that is not as sexy, you know, whether it's making
Guests: sure that your turnover rate makes sense, that your hiring and firing practices are not generating any extra liability, that you've really gained out the risks that you take on with your sales
Guests: and your marketing and your hiring and firing strategy, that the contracts that you're in right now are not onerous, whatever debts that you've taken on are good terms and conditions, good interest rates, that you're not going to accidentally rope an investor into a personal
Guests: guarantee, that kind of thing. So we really like to help businesses just from the top down,
Filip Valica: because as we keep telling people in our sales pitch, they don't know what they don't know. You know, like there's such a knowledge gap in so many different industries, which is fine, because we can't expect everyone to be a legal expert. We can't expect everyone to be in
Guests: HR expert. And most businesses of the size that we talk to you, they can't afford a lawyer. They can't afford a full-time HR person. So it's better for them to contract it out to us
Guests: so that we can just build them just basically just how your business should run kind of guides just to make sure that they can take away from us a product that will let them run their business
Guests: smoothly up to a very large size at which point, you know, they can come back and we'll take more their money or they can just at that point retain general counsel retain a full-time HR person
Guests: and just have a product that make sure that their business is in the best shape that it can be. And we also offer peripheral services, you know, like if we have different businesses in our portfolio that we think can help each other, you know, they can synergize with each other
Guests: all the live long day and that's great. And yeah, you know, and also just just peripheral stuff like we help them actually find their investors, we handle their negotiations for them in many cases, we handle the paperwork and the filings for them.
Guests: So we sort of like to be a turnkey solution for capital investment or for private equity investment, really. Yeah. And so if someone's listening to this and they might be growing their small business, they're not quite ready to solicit outside investment.
Guests: What are some things that they could do to get ready for that, to prepare themselves for that conversation with you or, you know, with an investor? Sure. So the first thing that they should do is they should go to our website, which is www.c2groupllc.com.
Guests: That will be in the notes page for this episode, and just reach out to us and just make sure that they know that there are resources like us out there that can help them.
Guests: But the first thing really is if you are at a position where you are ready to take on the capital investment, sit down and ask yourself why you're ready for that investment right now. What is it about your business that makes you think that you are at the prime time?
Guests: Is your beta test complete?
Guests: Is your market maturing much faster than you expected?
Guests: did your capital dry up faster than you thought it was? Maybe you're desperate. That's not a bad position to be in, as long as you know how the money is going to be spent.
Filip Valica: And there are investors out there who their specialty is distressed equity, is what it's called, which is business is where they've got an idea. It was more expensive to get for minimum viable product than they expected.
Filip Valica: So as for what you should do specifically,
Filip Valica: you don't have to come to us with a pristine set of books because then you've got nothing to pay us for. You have to come to us ready to admit that there are some things that you don't understand
Filip Valica: that you are very proud of what you've accomplished, but you need a little bit of help to get over that next hurdle, and just be humble about the fact that we are going to come into
Guests: your business and tell you everything that's wrong with it. Not because we're mean people who hate you, it's because we think that your business, like any business, is going to have a chink in the armor somewhere, and you just have to
Guests: be prepared to really open yourself up to outside people who will scrutinize your business as closely or more closely than most investors will. Another really good point that you brought up there is that you need to be able to understand
Guests: what you're going to do with that money once you get it. A lot of people go into investment needing, you know, however much money, but once they are at that point where they're about to close the deal, you really have to sort of take a step
Guests: back and have a full plan on what you're going to do with that investment money. Disney World, right?
Guests: Vacations for everyone in Christmas. That's right. Definitely heard of that, people blowing the investment on expenses that don't help the business
Filip Valica: grow and… Yeah, don't do that.
Filip Valica: Mismanaging that.
Guests: I really appreciate your advice. And before we go, I would ask you for one last tip that you have based on all the small businesses that you've worked with. and you know you see people struggling day in and day out with stuff what is something that you wish
Guests: that people would just do more of or stop doing so they could you know and it might be related to the conversation that we've had and it might be just something that you just kind of pluck out from thin air that you're like you know what the the small businesses would be better off if they
Guests: just did this one thing differently okay well i'll cheat and i'll give you two okay um the first thing that i'll say is if you're an entrepreneur um or what we call a wanttrepreneur if you're
Filip Valica: just getting started, please do not fall in love with a business, fall in love with a business model,
Filip Valica: make sure that the things that you are doing, that the product that you're passionate
Guests: about, that you can actually make money out of it. And I guess the second thing that I would say would be, when you're at the startup phase, scourge on a startup attorney who can just make sure
Guests: that you're filed in the right state, that you're classified as the right entity for your needs,
Filip Valica: that you're set up in a way where just the most preliminary stuff about your business is done right because that's the kind of thing that is where an ounce of prevention is worth an ungodly mountain of
Filip Valica: insure where that's the point where you just got to get it right it's incredibly easy and it's usually very affordable great advice um i mean in the distance of that i think the the best advice that i could give
Filip Valica: anyone is to read literally every business book that you can get your hands on. You're not going to go wrong in doing that. More knowledge is always going to help you. Yeah, don't reinvent the wheels. Someone else has tried what you're trying. Great. Tell everybody what they can go get more information.
Filip Valica: Sure. So you can not get more information by going to our website, which is www. letter C number two, grouplllc.com. We are C-squared consulting.
Filip Valica: or also just give us a call at 508309-590 or send us a message either at
Filip Valica: Chariss at C2Groove LLC.com or C-R-A-Y at C2 Group LLC.com. Also on the website, you've got a guide to employment practices risk management for
Filip Valica: small businesses and some other resources as well. Yep. So this is just a real quick guide that we put together on what we call risk management. This is just a guide for small businesses that are making hiring and firing decisions, which is a minefield of liability.
Filip Valica: The PES is free, very short. Just go check it out, get a copy, and make sure that you understand just how to manage the risks that you accrue when hiring and firing. Great. Well, thanks again for coming on the show, guys. It was great having you on, and I appreciate you sharing your advice with everybody.
Filip Valica: Hey, as always, thanks so much. Yeah, thank you. You doing a great job. I hope that you took away some good points about getting your business ready for outside investment from Chris and Chariss. Here are my three takeaways this week.
Filip Valica: Number one, understand the key accounting metrics for your industry. Find out from industry associations and trade groups what the typical ebidah rates are or even what percent of expenses typically go against payroll, marketing, or cost of sales.
Filip Valica: This may even help you focus on the biggest improvements within your business. Number two, don't underestimate local networks. We're often busy running our businesses and don't have time to meet others in person,
Filip Valica: email is faster, more efficient. But making real connections is important. Remember that people make lasting connections with other people who they can relate to.
Filip Valica: Number three, hire experts when the risks are high. Accounting and legal issues are two places where us business owners can make costly mistakes really quickly. I talk about DIY product development a lot, but a good accountant
Filip Valica: or lawyer or other professional should save you many times what you pay them. That's a goal that I set when I work with my clients anyway. And if you'd like to get these takeaways in your inbox every week, just go to
Filip Valica: the product startup.com and scroll to the footer of any page and sign up to the weekly wrap-up. At the end of the week, you'll get three takeaways for each guest, along with interesting articles, free tools, and inspiring innovations to help you with your own product startup.
Filip Valica: Join me next time as I speak with Bill McAlister with Top Dog Direct about as seen on TV products and product licensing. I know many of you have emailed me about this topic so you won't
Filip Valica: want to miss that episode next week. Once again, I've created the product startup workshop, a Facebook group to meet and get help from other product founders like yourself. So just go to the product startup
Filip Valica: com slash group or search for the product startup workshop on Facebook to join. Thanks again for joining me today. I hope that you're taking massive action on creating your products and I'll see you next week.
Filip Valica: Thanks for tuning into this episode of the Product Startup Podcast, the show that teaches you what it really takes to bring your product to market and turn it into a big success. This podcast series is brought to you by Mako Design + Invent, the first firm in North America to provide
Filip Valica: global caliber end-to-end physical consumer product development to startups, inventors, and small product businesses. If you're looking for product development help on your invention, head over to Mako-design.com. That's M-A-K-O-D-D-D-com for a free conference.
Filip Valica: from one of Maca Design's four design studios from coast to coast. Thanks for listening and see you next time.
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