Shownotes
There will come a time for business owners to start to entertain the idea of ownership transition. In one way or another, they will have to transfer their businesses to the hands of other owners, carrying over not only the business itself but the employees as well. Shina Culberson, chartered financial analyst of Quist Valuation, talks about the processes of valuation and how businesses can drive value. She covers the importance of creating a culture of innovation among employees starting with the customer mind rate. Sharing as well how they lower the barriers of entry to valuation, Shina provides some actionable and deliverable information to business owners as she shares her business journey.
—
How Businesses Can Drive Value During Ownership Transition with Shina Culberson
We are so fortunate, we’re in the world headquarters of Quist Valuation with the President, Shina Culberson. Shina, thank you so much for your time.
Thanks for having me.
Tell us a bit about your business and who you serve?
We are a business valuation firm. Many people don’t know what that means. To make it very simple, what we do is we work with primarily privately held companies and/or family-owned businesses to help them understand if they were to go on or sell their company, what could they sell their company for. What is the dollar value of their company? We work mostly with privately held companies and they can range from anywhere from $2 million in revenue to a billion dollars in revenue. We believe that looking at a broad breadth of clients across various life cycles makes us better at what we do. It provides us contexts when we look at different companies in different industries.
Folks would say, “What makes you qualified to go out and do this? What brought you to business valuation?”
Business valuation experts are also called business appraisers. There is a credentialing involved. I personally hold the Chartered Financial Analyst designation, which I don’t know if you’re familiar with. It’s quite a rigorous designation to obtain. We here at Quist actually support all over our analysts receiving that designation. We hold it in the highest regard. We think it stands out amongst many different designations within the industry. To be qualified, you need to work with somebody who has experience or this is something that they are doing on a full-time basis. I have many friends who are CPAs. They’re very good with numbers like we are, but they’re not necessarily qualified to do business valuation. There are a different financial theory and techniques involved. Finding someone where they’re doing business valuations as their full-time practice would be an important qualifier.
The understatement was that the CFA is a hard thing to get. It’s a very narrow funnel. Very few people come out the other end in the CFA. Then you’re also doing credit analysis for a major investment firm, I believe, in your previous life.
I’ve been an analyst my entire career. I graduated from college with an Economics major and had an Asian Studies minor. I spoke Japanese. I lived in Japan for a little while. My first job was at a Japanese bank in Los Angeles. I started out as a commercial banker. I probably was one of the last people to go through a formal credit training program sponsored by a commercial bank. I moved into asset management with Charles Schwab Investment Management. I covered the international markets. I did credit research for them. That was a fascinating time because I covered financial institutions so I was there when the Euro was launched. I was in Europe talking with the central bank, talking about lender of last resort across Europe. I was around when there was the Russian ruble crisis. The Japanese economy was tanking. It was a fascinating time when I was covering the international markets at Charles Schwab. From there, I did a short stint in mortgage banking. Then I finally found my way here to Quist.
The challenge is you don't always have customers who are willing to fill out the survey for you.
I think about the qualifications to understand business. Clearly, the credit side matters. You look at balance sheets. For you, typically a potential client comes to talk to you about engaging your service. What are the typical two reasons why a business owner would contact you for your service?
Ultimately at the end of the day, business owners have this idea of ownership transition. It can look many different ways. If you take a startup company, they are also dealing with ownership allocation. They’ve got the founders of that startup company. They’ve got venture capital investment and so they have preferred shareholders. They’re also working with retaining employees. They’re looking at issuing them maybe some options. All has to do with capital structure, ownership structure, ownership transition.
For a startup company, business owners who come to us primarily for that stock option program or to raise capital. Other business owners might come to us because they’re doing some complex tax and estate planning work, which is about ownership transition at their death, getting those plans set up today to create efficiencies for wealth transfer. Hopefully, many years and decades down the line when their state passes onto the next generation. The other reason a lot of business owners work with us is that they’re trying to bring in a management team into the ownership structure or an identified key employee that they want to retain. They want a mechanism for bringing them into that ownership structure and incentivizing them to eventually take over the business so they can retire.
I had a little exposure in the exit space. When you go and do a deep dive into a company by and large, when you’re done where everything’s at, if you’re looking to companies that you’ve done it for and you look at the beginning of one or two years after you’ve done it, what are the biggest changes or transformations you see in that company after the owner has the analysis done?
When we talk with business owners, we focus on six business value drivers, but I will tell you that it comes down to number three. I believe they are easy to accomplish tasks that a business owner can do for their company. When business owners ask me, “Shina, what are the three simple things I can do for my business to drive value?” One would be, and this sounds silly, do all of your management team members have a clear job description? Do they understand their job description? Are there actions and objectives tied to some sort of financial reward or metric? There’s a clear link between what they’re doing and how they’re going to be rewarded. It sounds simple, but very few companies actually have a very clear link about job descriptions and financial reward. What happens when we get into our business, we start wearing lots of different hats. We start picking up tasks and duties that weren’t part of our position but we’re doing them anyway. Then the job descriptions fall stale very quickly.
It’s an easy thing to do and it’s one of the things that creates clear objectives and outcomes for an organization and especially the management team. That’s one simple thing that we advise business owners to do. The other thing, we ask them about their systems and processes and how they’re documented. How can a business owner or a company continue to create these repeatable processes to have a repeatable revenue stream? Do they have the systems and processes in place to have a guaranteed standard quality of service or product? Do they have great visibility into their revenue? Writing down systems and processes making sure the entire company, employees, and staff understand what those are is not always fun to do, but it’s necessary to create that predictable outcome. When it comes to valuation, predictable cashflow streams is highly important to value.
The third area that we talk with business owners about, and this may sound out of the box a little bit, but it’s innovation. What do they do to continually innovate within the organization? I’m a professional service firm. I think many of my colleagues who run professional service organizations like law firms, accounting firms, they’re like, “What’s to innovate? We provide this service.” As you know people, especially Millennials, they want to receive these services in different ways. Nobody probably knows this more than the wealth advisory industry these days. Having this culture of innovation and how do you keep things fresh and making sure that you’ve got a culture of delivering systems or delivering services and products in a way that clients and customers want to see them and receive them is important. We talk about innovation, which is not normally what you might think about when we’re talking about valuation. We want to see how the company’s thinking about future strategies and business objectives.
Ownership Transition: There’s a clear link between what your employees are doing and how they’re going to be rewarded.
There are three things they can do. They can go through, “Why would I want to do that?” It’s because potential buyers will look at those things. You have it redone. If you have them, good for you. If you don’t, your company’s worth less. In the innovation side, let’s say you talked to good old Mr. Smith at company ABC and said, “You don’t have the structure or history innovation here. Here are the one or two things I would recommend you start to do to create the culture of innovation.” What would you tell them?
I would say start with the customer in mind. Most firms don’t have a mechanism for actually serving their customers and knowing if they’re satisfied. What would they like to see differently? Not that you have to address every customer comment, but you can probably start seeing trends about what your customers want to see for your product or service. That creates opportunity and innovation within the organization. It starts with the customer and it probably starts with just you having a way to regularly talk to your customers. Understand how satisfied they are and what would they want to see differently from your organization.
Surely would be simple.
SurveyMonkey would be simple. The challenge is you don’t always have customers who are willing to fill out the survey.
In the other part too, you have a series of customers that has a different idea of what you should do and you go, “Perfect.” Which one is the pearl? We’ve heard Blue Ocean Strategy. For the folks that haven’t read that and are trying to innovate, that’s a good place to start. As you talk into businesses, where it says Quist Valuation on the nameplate, the reality is it’s a whole of more than that on what you guys offer. It’s just not valuation. It’s advice within the business and how to operate. What to do to polish up the balance sheet? For many business owners, what would you say to the business owner, “I’m so busy I don’t have time to gather all this to have a valuation because I already know what it’s worth?”
It’s one of the reasons why we drive our valuation process in a highly systemized way. I think it can feel very overwhelming for business owners if they say, “How long will it take for me to go from the beginning to the end of a valuation process where I can have a report in my hand?” For us, that can be anywhere between six and eight weeks. My goal is to break that six to eight weeks down into one-week sprints so that they can understand in each week what sprint is happening and where their time is needed. When I break it down that way, they realize, “You need me in week one, week three and week six.” You’re doing your internal process in week two before week five. When we can break the process down into a sprint like that and they see what side of the court the ball is sitting at, they realize it doesn’t take that much of their time to perform a business valuation. Hopefully, this will be another good tip for any business and have all their documents well-organized where they can find them. That would be a basic management of the company. A good management of a company is having all your documents in order. That first part of gathering documents isn’t that onerous.
That sounds simple but not necessarily true. You get so busy as a business owner doing what you do. Cashflow, customers, family and all the other things that take up your life and you think about, “I’m not sure if I have time to carve that out.” There’s probably too much to talk about here, but the difference between average and below average investor classes is an enormous difference in the company valuation. For you, when you get done with the valuation you say, “Here are the things that you can do and here’s how and why it matters.” You can change the trajectory of the potential sale price.
We don't need to be the smartest people in the room in terms of proving it to make someone else feel dumb.
We actually changed the vision and mission of our company. When I first started the organization here at Quist, there was a prideful culture around being the smartest person in the room, being technical experts at what we did. We are a technical expert at what we do. My perspective is we were making ourselves feel good by speaking a lot of technical lingo to business owners. It didn’t serve the business owner. When I came in and became an owner of the company and started running the day-to-day operations of the company, I was dedicated to changing how we spoke to business owners. We’re providing them with information and tangible actionable ways so they can take the information that we provided. We sit down with management teams for hours, two hours, three hours at the time.
We have so much information and insight. To be able to deliver that back to business owners and give them actionable items at the end of the day, to drive value higher in the company, be able to make better decisions and drive performance, that was how we change the vision and mission of the company. We change how we wrote the reports. We change what information we brought to the first page versus the last page. We got away from this idea that we need to be the smartest people in the room. We don’t need to be the smartest people in the room in terms of proving it to make someone else feel dumb. We need to elevate the business owner and give them the actual item that they need for their company.
Did you buy this company eleven years ago?
I started the company eleven years ago and I bought the company in 2012.
You decided to change the nature of the deliverable to where it’s actionable. I’m thinking about your thought process of what was going through your mind, “I’m going to change how we talk to the customer.” What was that like? What drove you to the thought process?
To be honest, frustration. Frustration because we have a six to eight-week process. We sit down with management teams for one, two, three hours at a time. We’ve taken a lot of information. We’ve put a lot of hard work into this deliverable for the client. We would write this 100-page report. A CEO would go to the last page, look at the number and they take the report and put it in their desk. I was sitting at a client’s office here in Boulder. They had been a client of ours for ten years and they were going through some management change. The CEO came in and he’s like, “I’m so glad you’re here. You wrote me this report, but what I need from you is I need you to write me a one-page memo just telling me what are we doing well as an organization and what do we need to improve in the organization?” In pure frustration I say, “If you would just turn to page 36 of the 100-page report, you would get what you needed.” It was a wake-up call for me. “Why is it buried on page 36?” We were already doing the work. We’re already providing the insight but it’s not just packaging.
We did change where we put it in the report, but I also think we change a bit of how we wrote what we believe those strengths and weaknesses were, to make them more actionable. It wasn’t just the company suffers from excess customer concentration. Our largest customer makes up 20% of the revenue. There was more on the company side suffers from excess customer concentration and if they were to do X, Y, Z to reduce that customer concentration, it would create a better predictable revenue and less risk going forward in case of a downturn. Whatever the recommendation was, we just slightly changed how we deliver the information. It’s putting ourselves in the shoes of a business owner, instead of the shoes as the technician. It just changes what we did enough to make it feel more valuable, more tangible, more actionable.
You were sitting on the same side of the table.
It stemmed from a number of frustrating meetings, “I’ve just written a 100-page report and they still don’t know where to find the information that’s most valuable to them.” We have been doing that way for decades.
I think about that and for many of the businesses, it’s hard to get fresh eyes. You go, “I could have moved that to the executive summary, page one.”
It’s putting yourselves in the shoes of your client and what they need. ln hindsight, I should have been asking my clients all along, what’s working? What’s not working? What could be better?
You bought the business at ’12. When did you have a discussion with Eric? Was it before or after ’12?
It was after ’12.
Ownership Transition: Have all the documents well-organized where you can find them.
As a business owner talking to another business owner, your perspective is different. You start hearing with different ears. For the business owners that are out there, there are many different reasons why valuations come, some are elective and some are not elective where you have a death, disability, a challenge or disagreement in the partnership. There are so many reasons that valuations are brought to the table. Before I forget to do this, for the guy that’s going,...
