Small businesses who are looking to grow, but feel like they are stuck need to consider bringing equity into the business. This allows them to consider if they should work with a partner or partners and under what conditions and structure. Ann Bennett, Founder and CEO of KBA Associates has been helping small businesses move into a state where they can grow the company for five years then sell it or grow it so that their children can take over. Ann explains that a company cannot run without people, so strong employee management is vital for growth.
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How Equity in Small Businesses Help Growth with Ann Bennett
As our guest, we have Ann Bennett. She’s the Founder and CEO of KBA Associates. Ann, tell us about your business and who you serve. Before we get too far into that, let’s dig into your journey to this point and your background.
Thank you, Bob. I appreciate the opportunity to discuss my business, KBA, with you. I work with small and medium-sized businesses. I’m going to give you my background first and then it’ll journey on how I work with them. I have a Big Four background, started out in audit, then in consulting, left Big Four, and started an IT company that did large trading partnerships. We developed a software and we had customer service. I did that for fifteen years then I sold it to a strategic buyer and was a director of national tax at the company that acquired my company and had a non-compete. After I left after the non-compete, I realized that I had a lot of knowledge and had been beat up a lot in the small business world that I could help small businesses.
Specifically, what I’ve noticed is the lack of the journey of finance. You don’t look at your financial statements fifteen days after year-end. The financial attributes are throughout your company from day one, and every activity within the company has a financial component and should have a return. That helps in your decision making and your planning, and that’s why I help companies in strategic planning, executing the planning, making sure that the finance flows out throughout the company and the margin area, returning on marketing in sales and promotions. When you go to a conference for example, $10,000 spent at the conference, what was your return? What did you do? What should you do with the cards? That makes a difference in your growth.
The thing that folks are thinking, they go, “You went quickly through the fact that you started a company and ran it for fifteen years.” Most companies don’t make it that long nor do they get bought out. Let’s dig in a little bit to the start of your company and the growth and then the subsequent sale of your company. You left audit in the Big Four accounting firm. What was that thought process like when you said, “I’m leaving a great job, good security, and I’m going to start my own business.” What was that like?
What happened was I was going with a company that was going to do a large trading partnership in oil and gas, because I had done a lot of systems work in oil and gas, and I got a call. I never know how the call came. It came on my phone and it said, “Ann, we need a partnership system. Your name came up and we’d like you to write it.” I put together a couple of programmers and second floor of the train station and we were off and running. However, I was very lucky. In that environment, there were only three other public accounting firms that had large mainframe systems.
Where was this at the time?
Denver. There were a couple other companies that wanted to have a system available because they wanted the audit work, but they didn’t have the systems work, but we were developing the system. I got my seed money via a non-compete, giving them marketing and sales rights, that was my fundraise.
It was you and some programmers to start with.
There’s a situation, and I’ve noticed it a lot lately. Because of the automation of you sending your resume, the automation tool pulls off certain functions that you should have, and a lot of resumes don’t pass the automation tool, and so a lot of people are on the street. A lot of people are looking for good people, but they’re not getting within the company because they are being screened out by automation. In my case, I didn’t have automation, so I read the resume and what I look for with skill set. For example, we had to hire 50 people every year to deal with customer service. The person that I hired to be in charge of that was a manager at Starbucks. I taught him tax, he knew customer service. He was perfect.
I always talk about you can find people around that are extraordinary and you can teach them many things. How did you find this guy in Starbucks? Were you at the Starbucks when you found him?
Yes. Because we were lower downtown and he was down working at Starbucks. We started talking about what we were doing and he said, “This is pretty interesting.” The other thing is because partnership is very complicated, there’s a lot of tax code involved. I would go to Wall Street and I would find a partnership, and then we would break it down. What components? What technology? What data do I have to have to produce that? That’s how the program was learned partnership. It made it exciting because there was always a scandal of partnerships. There’s always something going on.
You were talking about that many years ago, you went into one of the White House firms when you had the first non-mainframe computer and did some work for them as well in the partnership space.
I said I would develop it only PC-based. We were lucky enough to run into a software that was developed by the army in the ‘60sand it’s a variable length record, multi-varied field. The variable length record means if your name in a mainframe, you have to have twenty characters. If I have to add five more, that means my IT department has to spend a month changing. The variable length record allows for a dynamic back and forth. I went into Merrill Lynch on the second floor down to Battery Park and they said, “You can’t do that.” I said, “Yes we can.” They said, “We’ll see you tomorrow morning.” I said, “Okay,” and I have programming staff with me. We worked all night and the next morning we showed it through.
What was your computer that you’ve logged in? Was it a Compaq?
Yes, it was. It was about the size of a sewing machine. In fact, I was asked when I carried it on the airplane why I was bringing my sewing machine and I said “No, it’s my PC.” To get back to small business, one of the biggest problems that I’ve noticed is they’re not taking advantage of the opportunities of the tax code. They send their data every year to the tax man and he asks a couple questions and then he spits out a K1.There were some tremendous advantages like for instance, research and development credits. Research and development credits are not just for software. They’re also available in the construction industry, green buildings, manufacturing, Internet of Things, now called IoT, all that has R&D attributes. The thing is you can’t capture the data at the end of the year. Embed it with your payroll reporting, embed it in with your materials acquisitions, so that it is the credit is accumulated throughout the year.
When you’re working in the small to mid-size business arena, I would have imagined that you get asked similar questions. What are the top three to five questions or problems you typically get asked when you’re consulting and working with these small and mid-sized businesses?
Flow of information. Information tends to be siloed. Too many Excel spreadsheets. We’ve got to embed the data within the accounting system. That could be that they purchased the system, but there was nobody to help them implement it to help bill a salary, embed, and use the system. They’re afraid of the system. They’re afraid to get rid of their Excel spreadsheet. It made them comfortable.
If I’m that person in that business that has a software and I said, “Ann, I need some help with this,” what do you do?
I would look at what’s being done on the Excel spreadsheet and what can be embedded in the original entry rather than after the fact on an Excel spreadsheet. You incorporate the data within the accounting system. The accounting system is not an office in the back, the accounting system flows from marketing, sales, production, and all the way through.
You advocate that rather than just a static at the end of the year, it’s a working, living tool.
Breathing tool, all the talk. The systems available now are reasonably priced, that they can be embraced.
What systems would you mention?
I would look at what they’re doing. A construction industry needs different features than a production system.
There are specific applications you can custom tailor.
I would look at the available system and see which one fits based on their price point and what information they need.
What makes you an expert in the systems?
I did it. I wrote one in PCs. Before that, the mini-computer world was all we have for oil and gas.
For you, the period of time that you ran your company, I wanted to circle back to that. You’re sitting at some point running your company and a buy-out offer surfaced. Was that out of the blue or did you anticipate that?
No, they attempted to put me out of business for four years every way they could. The two big four firms merged, and they asked the firm that I’ve worked for to call me and they said, “Ann, we’d like to entertain a buyout, but we’re so confused as a result of this merger. Can we call you in a year?” I said, “Sure, always talking about competition.” April 16th, they called and they said, “We’d like to talk.” At that time, I had to make a decision. You have to do some exit planning, and I had to look at the makeup of the company. I had 30 employees, and so I felt it was best to sell to them and return a thousand percent of my investors. All my employees were hired, they all got 10% signing bonuses, they got equal salary, and they immediately invested their 401k. This was something on their resume that money couldn’t buy.
What year was that?
Right before the dot-com bubble burst, which was 1999. It was September of 1999.
For you as you look at that, you built this company, you have been running it, and it’s a family member. What was that like the day after it was sold?
I’ve thought about that a lot and I’ve thought about it as I talk to small businesses. There is a fear of what happens the next day, so I did a couple things. One is I had a four-year non-compete, so I was in it, but they didn’t want me in the business again. I went on board, I made an agreement with them that I will be on board for that period of time, and during that time I would work with the existing client base I had and all the employees to transition from height IT company into a big four public accounting firm. An owner of a company has to make a decision, and I’m working with a company right now that has a niche software and he has had some inquiries to buy him out, but what they want is this customer base. You as a small company need to be positioned that you make the decision. You make the decision when you’re going to buy, get sold, how you’re going to get sold, who the buyer is going to be, and on what terms.You as a small company need to be positioned that you make the decision. Click To Tweet
For instance, I’m a small business of some description and I’m trying to do some exit planning. What are the things that you would recommend to me as the business owner to start to try and say, “I need to prep my business for sale, how do I know what it’s worth?”
First of all, we need to talk about what your business is, where you want it to go, and what stage of your life are you in. Usually a small business is stuck and they want to move in a direction. Do you want to move in the direction you want to build it for five more years and then find a strategic buyer? Do you want to build it for five more years and your son is now going to be 25 and you’re going to take him into the company? This is good example. My brother in law has a large heating coil company and he has a son and a daughter. They both went through engineering school, both got their MBA. At the age of 62, he became chairman of the board and his son started out as sales and became president. His daughter started out in the IT department, and she is now the CFO. It’s unique.
In my case, a strategic buyer was perfect. For one thing, they pay Exit EBITDA because it was a strategic buy for them. Rather than go out and sell those clients, it was easier to buy them. Since our system was PC-based, we could handle private and different kinds of partnerships. It opened up a whole new sales and marketing. You have to look at your company, because you’re coming can fit in to a strategic buyer where they don’t have that product. You’re a compliment to their existing product.
Was there another company similar to yours that sold at any time in that?
How did you know what multiple it should be sold for?
You have to look at a combination of things, especially in an IT company. You have to look at how long it would take to develop the software, what the revenue stream for their client is, what the potential for new business is, and you put some factors and some dollars on that. Also in the case of a public accounting firm, this is consulting, but they’re going to add on tax, audit and special projects. It’s a vehicle to get into a client base that would be difficult if you just went in a bit on the audit.
It was a value-add for them and for you as a business owner because that’s the world you came from, you had a feel for that.
I also upped the price. I also went back and counter. Do not be afraid to counter.
You didn’t have to sell. Where I’m heading with all of this, for the business owners, everybody’s going to have an exit strategy or you die or the state has one for you. You look at that and you go, “I have a business. What other businesses like mine sold for? What are the key points that they’ve sold for?”
It depends on the industry. If it’s a software, you don’t just sell for Exit EBITDA especially because you’ve got new tax law to deal with. The EBITDA escorts is going to be a little bit different because they wanted to make them even with the C-Corp so there’s a complicated formula now that you have. You have to look at what you want to do for the rest of your life, what position your children are at, and what position your family unit is. If you’re a small business and you want to grow the business, you may have to bring some equity to grow that business where you want. Do you want to do that? Do you want to have a partner or partners? Under what conditions do you want those partners? What structure? I recently talked with company and they had a dynamic software product. Software drives a lot because it’s a good tool, good vehicle, and they needed sales and marketing. They decided to have their company acquired by a private equity company that’s going to be the star at sales and marketing. It hasn’t turned out that well.
For the folks out there, if it’s not already apparent that you have a broad range of skill set from being in audit and running your company and selling your company and understanding intellectual property and all of these things and you bring that expertise to the table. If somebody said, “I need to talk to Ann,” or at least have that conversation, how do they find you? Is there an email that you’d care to share?
I have an email, firstname.lastname@example.org.
I think about businesses and coaches, and many of the business owners are so busy in their business that they spend little to no time on their business. They get stuck. How do you help us unstuck business if they bring you on board?
For one thing, I don’t give them a list or a book and say, “In order to sell your company, you have to do all of this because it’s not going to get done.” We spend an hour just sit and talk. “What’s your problem? What’s your low hanging fruit? I see right now, if you can envision a hamster on a wheel with a cashflow, all you’re doing is responding to your cashflow. You’re getting more and more business, you have no idea if the margins are there to sustain that growth, or actually you’re growing and revenue, but you’re losing money, and you don’t know it yet because the cash is coming, and you’re on the wheel.” There are a lot of private equity, business brokers, lists, books, “You have to do this in order to position your company for sale,” it’s not going to get done. It’s too much. You have too much else to do. Let’s that’s pick and choose what’s important, what’s going to give us the biggest bang for the buck, and work on that. What is very important is strong management. You can’t run a company without people, good people, loyal people. You need to give them the tools they need to be good employees and also communicate with them.
You finished the hour consult with somebody that reaches out to you and you guys come to an agreement.
What I would do is after we discussed, I will sit down and I would draft that one page. That’s all it has to be. One page.
You have that, and you’re not just working in the front range of Colorado area. You’re nationwide, and when you look at that experience, they would expect next steps from you. What is it for you? Let’s say that you’re trying to help a company integrate their accounting software throughout the system. What would be something that you would envision as next steps?
I would look at, first of all, their documentation that they’ve drafted and then talk to the people. What’s happening? What’s working, what’s not working? Is it the software that doesn’t have the buckets that you need to capture? Did the salesperson with a software company say something and then that didn’t happen? I look at their contract if it’s in IT. I have an example. There was a small modification in a software package that needed to be done and they had just acquired the software for $800,000. Because I develop software, and I knew it was a very small change. I said to the client, “It should be incorporated in the $800,000.” It’s a couple of fields to be captured.
We’ve talked a lot about IT. Is your niche specialized in the IT space or do you consult with others non-IT?
Non-IT but I use IT. I use IT for two reasons. One is it makes things easier. It makes information accessible throughout the company when you have a good strong IT system. Salespeople, marketing, and managers should be able to dial in. You should be able to look and run a period to date, not a month end or a year end, a period to date right now. What do my financials look like? Everything should be real time.
For business owners, a lot of times they don’t have red light, green light, or yellow light system set up from their software. “This is in tolerance, this one’s out of tolerance.” Is that something you can bring to the table?
Yeah. I remember when somebody asked me if it would print in red. I said no, but I can give you a minus in front of it. Actually you could. One of the things we should sit down and discuss within the hour is, “What do you want to see that you’re not seeing? What’s meaningful to you? I can give you a financial statement, but what numbers do you want to see? You built the company.”
For some of the companies that have banking relationships and they’re looking at they’re either in loan covenants or they’re not, it would be useful to know. Can you drive their software where it will tell you that they’re compliant or not on a period today?
Yes, and that’s very important. Is very important because there’s a regulation within the banking community that they have to do due diligence on their commercial customers. They’re not doing, things are good, but we went through 2008. Preferably we go through it and when we go through that cycle again, we go through it with a lot more sustainability than we had in 2008.
In your experience in working with businesses, do you think 2008 is faded into their memory?
Yes. I’m afraid it has. That’s because they are all the hamster on the wheel and they’re busy. Business is coming in, it’s good and so cash is in the bank.
It’s like driving the car with no brakes. There’s no way to know when it’s starting to stall or rollover. If they don’t have those blinkers set up, then that’s a challenge. For you, we’ve talked about the various things that you bring to the table for the small business. Is there something in the small business world that you bring to the table that I failed to ask you about?
Empathy. I’ve been there. I’ve done that. We went through two tax code changes. We went through the dot-com bubble. We went through the resolution trust. We went through the 90’s. We’ve been there. We went through it all, Reagan’s tax code change, and so I understand as I’ve been there.
For many of the consulting world out there, you get the laundry list, you get to the academic solution, and for you, yours is real world on top of being in the accounting space and building a company.
In connection with that, as we develop their financial system, I also developed so that when the auditors come in, it’s very quick. It can be produced. When you have to do the taxes, it’s embedded. The financial is embedded within the company for both the company and for the outside, and for the banks, rather than all these ex extraneous schedules that are being developed.
You’re in compliance all the time because you can run it period to date. We’ve talked at length about what you bring to the table so people know how to reach you. Now I thought I would quiz you to death as we go along. We were talking a little bit beforehand about influences on you. What’s the most recent book or influential book that’s altered your perception on being a CEO or how you run your business?
I just found a book that I’d read ten years ago called Focus. It’s very small, and I started to read that again. It’s going to be good. I’m going to write something on that.
On some of the books and particularly the ones that were particularly moving at the time and then you go back like an old friend and read them again. We take different things as we go back through it again. Our needs are different.
There’s another book, Making It Stick, and that deals with change. You’re talking about putting in an IT system and you’re in a group with the employees. You don’t understand, but one employee is having a problem at home. Maybe his son ran away, maybe his son’s having trouble in school. He is not grasping at the same way. You leave. He’s scared because he didn’t really engage in that training session. You have to recognize that in IT development and make sure that there is a way to grab him and bring him back in.
That sounds like a personal experience. Out there, folks have habits that they bring to the table. What is your most unusual habit or what others may consider out of the ordinary that’s helped you or your company most and why? You said you were interested in diving.
I do underwater photography, but I’d say the habit I have is when I get confused or frustrated or uncomfortable, I will exercise. I’ll go for a walk. If I can’t write a letter, I’ll go for a walk or go for a run and write the letter in my head.
It’s funny. I’ve heard that more recently than probably any other time in the past. People say, “I’ll take a conference call on a walk or I have a meeting, I’ll go for a walk for the meeting, or I can’t get it done.” Hemingway used to leave a sentence undone when he went to bed at night and he said, “My mind will finish it in the morning.” It makes me rethink about what you’re talking about. It’s so hard to take in and not be active if your body’s moving in your mind.
It flows. It just works.
We mentioned diving. Diving is somewhat of a precise skill or bad things happen to you otherwise. For you, is there a parallel between underwater photography and running a business that comes to mind?
Attention to detail, and that’s true for a business owner. Pay attention to the detail. That’s where the trouble is. That’s what the devil is always.Pay attention to the detail. That's where the trouble is. That's what the devil is always. Click To Tweet
Usually you’re standing in a diver pole right now and you’re going somewhere you relatively said you haven’t been before. You have a pre dive routine, I suspect. What does that look like?
They tell you the map of the area and I grab my camera down and I go.
Do you take in and do the battery check and your regulator check? Are all of these things second nature now?
Second nature. I’ll click it to make sure that there’s air. Make sure my ears turned on. I have jumped in without it being on, but you’re paying more attention to your camera. Have your card, do your strobes work, but when you get down there, you’re paying attention to a lot of detail. You’re watching your gauges, you’re watching how many feet you’re down, you’re watching your air, continually watching that, as well as the cameras here.
Then you have a protocol for framing a shot, I presume.
Yeah. I tell the fish to stay right there because I’m coming over.
That works really well. In the advice space, what advice would you offer to a new CEO that is assuming the role of CEO for the first time and why?
To listen, be aware, and hang out. Don’t worry about all the rules and all the regulations, and just hang out. Walk around, meet some people, talk to some people, and go to the cafeteria.
We’ll pretend you just got appointed as CEO of this manufacturing company, and you’re walking out onto the shop floor and you see some guy working way or some lady working away. What would you go and ask him?
“How’s it going? How’s your day? Tell me a little bit about yourself. What’s your name? Here’s my name,” shake hands. Get them comfortable because that’s where the detail is, that’s where the problem is, those the things that they have not been willing to share because they’ve been afraid to share. You’ve got to open up the communication lines. It’s not a criticism. It’s because of the mission and the vision of the company and where you want it to go. That’s why you’re there. You’re there to increase the margins, increase to have it grow, and make the employees work together as a cohesive unit.
That’s the power of your company. That’s your power, and not your weakness. Your power. You don’t want them to leave.
Digging into that a little bit. You’re called to come into a company and they said, “We think we have some accounting issues,” and you walk in and go, “The communication channel is broken. There is no up-down communication.” What would you do if that’s the circumstance you ran across?
I would talk to the owner and talk to the CEO, because they have to buy in. You can’t start here. They’ve got to buy in and then it flows down.
If there’s a communication challenge, it usually means that either they didn’t know or they don’t have the skill. If they don’t have the skill, is that where you coach?
That would be easy to fix. Not easy to fix, nothing’s easy to fix it. I don’t mean to minimize it at all, but once recognized, the problem is in the recognition, then steps could be put in place, which goes along with communication and people’s willingness to open up. Don’t be scared, don’t be frightened.
That’s something you have to communicate to the employees to foster that, “You don’t need to be afraid of me.”
You have to have that buy-in from the owner and the buy-in from the CEO.
What’s a quote that you find meaningful and one that you use frequently?
This one is the best. “In changing times, there is an opportunity to make a difference.” That’s what we have right now.
Was it the Chinese proverb, “May you live in interesting times.” In my mind, it seems like changing times are just normal. I think about the 1990 Gulf War, ‘98 was long-term capital, 2000 was the dot com, 2008 was the mortgage meltdown. You look at that and these events are happening with regularity, and there are systems and methods of dealing with change.
They have to be put in place. Somebody asked me what the one thing was that I had to deal with in starting the company and also in growing the company. I remember what that was. It was fear of failure. Face it. If you fail, what can you do? I can do this, so I’m not afraid of failing.
You started your company in what year?
’86, when Reagan decided he was going to kill the private partnerships. Timing is wonderful, but we still had the trading partners. Then Congress said there’ll be a trading partnerships because we did Service Master and that was the C-Corp that became a trading partnership. Then Congress said, “We’ll give you ten years and you have to go back to be a C-Corp again.”
You started in ‘86 when the market was exciting and ’87. If I was to talk to your colleagues and ask them what you are best at, what would they say and how do you utilize this strength on a day to day basis?
Probably asking direct questions and solving problems.
That’s the one thing that I commented on. I said one thing I can bet on is that you’re extremely direct and I like direct, so I thought that was refreshing and a lot of fun, because you were at a table when I met you. It was absolutely apparent that direct was your forte, which is cool.
In business, we don’t have a lot of time. We have no time. Time is a race, so you’ve got to accomplish in the time we have.
I appreciate your candor in sharing your experience and expertise. I look forward to keeping track of your success here in the near future.
Thank you very much for the opportunity.
About Ann Bennett
I lead enterprises to achieve profitable growth, innovation and agility in transformative environments integrated with knowledgeable tax planning for the most profitable and sustainable growth.
Business sustainability requires strategic planning that facilitates growth, profitability and mitigating risks.
Collaboration among and within sales/marketing, operations/production, and finance are the successful ingredients for profitable growth.
I am a founder and developer of an IT company with a 1000% return to investors on its strategic sale. Executed successful sales channel development, timely relevant product life cycle development with increased margins and financial accountability throughout the company. All of them were aligned to execute the strategic plan. With my collective business development and big 4 professional auditing firm tax and audit I bring a varied and strong background of expertise to the table.
A frequent boot camp startup innovation teacher in the US and India and subsequent mentor in finance, go to market and tax. Are you fit to grow and exit on your terms? The planning begins now.
Maximizing strengths, minimize threats, and take the greatest possible advantage of opportunities available to you. Combined with the 8 business Ps of purpose, product, place, promotion, price, production, people and profit and the related numbers, financial and tax will give the strategic plan structure to minimize the difference between expectations and reality.