Your Business Plan; Are You Making a Living or a Killing?

“Go ahead. Make my day.” Harry Callahan (Dirty Harry) – from the movie Sudden Impact

I get the opportunity to see a good number of business plans / pitch decks each week and I focus on the section of the plan I believe is most critical. While some may believe it is the management team or barriers to entry; to me it is the financial projections. So at this point, you have to be saying, “Of course; he is a CPA. What is so surprising about that?” The truth is, there is no other place in a pitch where one can get a better picture of the “directional indicators” of a plan. Please allow me to explain.

Years ago, a colleague of mind was tired of working the long hours at our firm and wanted to become his own boss. He bought a Basking Robbins franchise. He accomplished his objective; he still worked long hours but now he was working for himself. However, at the end of the day, all he did was replace salary with small business income; from a financial perspective he was still just making a living.

If you are doing a pitch before investors, remember they are focused on high rates of return; getting their money back in multiples of what they invest. They are looking at what we euphemistically call “making a killing” and they are looking for you to “make their day” by showing them how. So where does the projection fit in to all of this?

First, what is the size of the opportunity in your eyes? If your projections show that in five years, your revenues will be $5 – 10 million, you cannot make enough money to attract most investors. Please do not get me wrong; growing a business to this size is a real accomplishment and can be financially rewarding. It is just not a killing.

Next, does the financial model follow the plan? If the plan is a SaaS model with monthly subscription payments, revenue is simple; multiply the expected users by the planned fee and that should be revenue. So now I can see how many users you expect to have (market share) as well as the monthly payment (market price). I can also look at how you plan to get to that level of users.

Finally, are the projections logical? If your margin or operating costs are substantially different from competitors, do you explain why or are you just plugging numbers to provide a financial result some online advice indicated was what investors want to see? It is a simple logic test that many fail on a daily basis.

Shakespeare said, “The eyes are the window to your soul,” and I think your financial projections serve the same purpose as it relates to your plan. So after you get done “crunching the numbers” please step back to see what they really say. There is nothing wrong with creating a nice profitable business model that might allow you to make a very good living for a long period of time. I have had hundreds of successful clients who have followed that path. Just keep in mind how this approach has to “step up” if you are looking for that investor who wants you to make their day.


The Liquidity Option for Equity Based Plans

“Winner must be present to win.” – common note on many raffle tickets

How many times have you participated in a raffle and noticed this “condition” boldly printed on your ticket?  I have been at more rubber chicken events than I care to acknowledge and I always cringe when I notice this warning.  My immediate reaction is always the same – is this event so bad that they have to bribe me to stay until the end?  We all know the winner is never announced before the very end of the evening – and once that lucky person stands up, we all head for the exits.

I think the parallel in business is ownership liquidity and in particular, the quandary many owners face to provide some cash to minority shareholders as they exit the business.  I have advised many long established enterprises and it does not matter what life cycle stage they are in, there is always this “Sword of Damocles” hanging over their head.  What happens if one of the owners leaves or passes on?  The remaining shareholders feel burdened by the commitment to buy out the departing party and it is this very concern that causes many shareholders to be silent about liquidity in their buy/sell agreements or not establish an equity sharing plan in the first place.  Perhaps the uncertainty as to growth and/or success also plays a role here.

Up until a few years ago, I had only seen this issue and mindset at more established businesses; usually in legacy type industries. Enter the current tech early stage growth phase (one of a few in my lifetime) and equity sharing is back with a vengeance.  However, this round, I have seen a different mindset sprinkled in with the plethora of discussions on stock options, restricted stock, etc.  There have been a good number of equity based schemes that really only have value upon a defined liquidity event.  No vesting or granting of ownership – simply stated – the holder of the ownership instrument must be present at the time of the liquidity event to benefit.  In essence the “winner must be present to win.”

Now, I do not mean to imply that equity in an early stage growth company is like a raffle ticket (actually, I think the raffle odds may be better) or that such an instrument should be seen as a bribe to keep you someplace that you do not want to be.  But, many would espouse that it is the team that creates the true value and unless the team stays until the end (liquidity) there may be no value.

So, if you are a young entrepreneur, you may want to think about this approach as one of the alternatives you consider.  As usual, please consult your professional advisor before reaching a conclusion.  While there might be some tax cost involved, think about the time, effort and expense you may have to endure to address that equity owner who has vested and now wants to leave and get fair value for what they feel they contributed.

Due Diligence and Early Stage Companies

“Surprise, surprise, surprise” – from Gomer Pyle USMC – played by Jim Nabors

I have had the privilege of being involved in due diligence activities (both buy side and sell side) for dozens of companies of all sizes. I had the chance to blog (November 2013) about being prepared for due diligence citing one of my favorite Monty Python sketches, “No one expects the Spanish Inquisition.”  That wasn’t just some pithy quote – a number of my clients used that analogy when describing the diligence process they were going through. However most were established companies with some history for a buyer to digest.

We have now been through quite a few due diligence exercises with very early stage companies. Many think it is a quick process; just answer a couple of questions and then wait for the check to clear. But surprise, surprise, surprise it is a bit more intense than you would expect. Compound this with how off point many of the diligence requests are and the process really gets convoluted.  I recently became involved with one startup that was being acquired and had been in business a little over two years. The potential purchaser’s diligence team requested the last 5 years’ tax returns and the entrepreneurs (taking the request literally) were in the process of getting together their personal tax returns for the earliest three years.

So, what do (or should) investors focus on when doing diligence on an early stage company? I would highlight five areas:

Management team – we always suggest looking at the team both current and future. Do the key leaders know what they have and what they need to get to the next level?

Dashboard report – what has the team laid out in terms of what they are focused on? Burn rates, the competition, a detailed plan to get from MVP to sustainable product and KPI’s are all key aspects to assess.

Traction – I do not just mean unique visitors to a site but customers or near term prospects who will buy your product or service. If you are selling to end users, it’s easy – how many swipes do you get and what is the trend. If you are selling enterprise level software, the sales cycle is longer and the question is how well do you know the status of each pursuit?

Equity – a complete cap table including options, promises and any “winks and nods” for future equity. If there is no equity plans covering employees or future key team members, that is also a red flag

Owners’ mindset – just like mature businesses I often see deals crater over sellers’ remorse. While subordinated notes have allowed all parties to “kick this can down the road” are owners ready for partners or to sell outright?

CPA’s are often retained to complete due diligence but for accountants used to financial data analysis, this type of diligence is not comfortable.  Other than tying down revenue, there is little they feel they can do. So, if you are in a potential deal and sense the acquisition deal team has the wrong focus, don’t be afraid to let the purchaser/investor know.  For many, this is still somewhat virgin territory.  Be prepared.

Keeping a Broad Vision

Scene at The Olympia Restaurant (from SNL skit)








Patron: I’ll have a grilled cheese.

Gus: No grilled cheese – – Cheeseburger

Gus: What do you want to drink?

Patron: Coke

Gus: No Coke; Pepsi

Probably one of the most difficult concepts for an entrepreneur to get his mind around is maintaining a broad vision. The concept of broad implies a wide ranging view while vision seems to suggest a certain focus. Seems to be an oxymoron – like jumbo shrimp. We encourage entrepreneurs to maintain that open view while continually harping on staying focused and this conundrum can drive the average business owner out of his mind. So let’s explore this a bit further.

Many of us remember the scene above from the famous SNL routine with John Belushi. You had to admire the tenacity of focus; but you were never going to get any form of potato other than chips, no entre other than a cheeseburger and no drink other than Pepsi. Pure focus like this can certainly define who you are but does it limit the customers you want to reach? Let’s consider another scenario. Why did Steinway and Yamaha have such different levels of business success? Some would simply point to a broader vision. While Steinway focused on producing pianos, Yamaha saw itself in the keyboard business. So when electrical instruments came along, electric pianos and organs were a natural extension of a broader vision.

Apple and Starbucks are also often sighted as companies who look beyond the utility of the products they deliver to a much wider view; focusing instead on the user experience to expand the appeal of their products to a much wider audience. In his book Start with Why, Sinek encourages us to continually look at the market through the eyes of our customers to always understand the true why of their purchase behavior. In essence, keeping a broad vision with focus.

I have seen this issue many times particularly with software development companies. They develop a great platform and in an attempt to demonstrate its capability, they build an application. Now that is all well and good until the application (versus the software) becomes the focus. Let me give you a real example. In the 1980’s, (“a long time ago in a galaxy far, far away”) I had a client that had developed voice recognition software. Now I know it is popular today, but trust me in 1980, it was revolutionary. They decided to demonstrate this capability by installing the technology in a phone (remember pre cell phone days.) Being the accountant, I wondered why someone would buy a phone for $350 where they could pick up the receiver, say “home” and have it call home automatically when they could push the button on the phone that said “home” and get the same utility. Apparently, the market saw the same thing, so instead of using the money they raised to improve the technology and license it to others; I watched them go out of business with an inventory of high priced phones nobody wanted. They saw the phone as focus; I saw the software as vision. Put another way, I saw the Olympia as an eating establishment with personality – – not just a cheeseburger factory.

So when it comes to your vision, please work to make sure it is broad enough to create sufficient opportunity and not so focused as to preclude your ability to fully develop your vision.



Do I Need a CFO?

People make money; they want to know how much.  People lose money; they want to know how much.  You will always have a job. – Rose Leone

When I was a teenager in the early stages of considering a career, I found myself taking a liking to math and business.  Accounting seemed to be a natural fit and I mentioned it to my mother one day.  Since my dad had passed away a few years earlier, the woman with the fourth grade education provided this sage advice.  For those of us in business, this role takes the form of a CFO and in honor of my mother’s recent 98th birthday, I thought I would pass it along to those entrepreneurs who wrestle with this question.

Well, coming from a CPA who helped place loads of CFO’s, the answer is an unequivocal yes.  And, the good news is that today the profession has evolved to the point where no matter your stage of development, a CFO is available to help.  You just have to know where to find them.  Maybe some clarification will help.

To begin with, a CFO is really a function and not a person.  Without too detailed an analysis, suffice it to say that this function has two key components – compliance (financial reporting, tax filings, etc.) and advice (strategy, funding, etc.).  At different stages of a company’s evolution, this function can take different forms.


The financial reporting can be handled by owners (usually using software like QuickBooks or Xero); and a CPA can help with the tax reporting and the advice part of the equation.  Those CPA firms in this space may offer this service at a very discounted rate.  There is also a group of complete outsource capabilities available.  The unfortunate point is this function is usually seen as a cost center versus a “value add” so owners often delay for too long the step of getting this function filled.


At the early growth stages, some of what is outlined under Startups may still be applicable here.  The good news is (again) fractional CFO services are available and, at times, you can get some real, experienced and trusted advice from someone you only use a couple of days a week… a great value to you, the owner.

At the later stages, especially if your funding becomes more sophisticated (venture capital or even IPO), you need that appropriate financial partner and should hire a full-time CFO.  Again, at times, the fractional CFO groups sometimes offer a “temp to perm” service which has great benefits.


In a lifestyle-type business, I tend to see models similar to startups with a bookkeeper-type person handling the basic financial reporting and the CPA covering taxes and advice.  For other mature businesses, I have seen more fractional CFO’s who can also help with succession planning and even the exit of the owner from the business. CPA firms are also playing this role.

So, my simple advice is to make sure your CFO function is covered regardless of your stage of development.  Doing so is a best practice and will help ensure the success of your business.