Former Investment Banker Now Virtual CFO Daryl Ching On How To Maximize EBITDA For Your Liquidity Event (#45)

Steve Wells: [00:00:05] I'm Steve Wells.

Jeffrey Feldberg: [00:00:06] And I'm Jeffrey Feldberg. Welcome to the Sell My Business Podcast.

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Jeffrey Feldberg: [00:01:39] Daryl Ching is founder of Vistance Capital Advisory, and as well recognized as an expert in structured finance. He has made numerous appearances on the Business News Network and has been quoted in major newspapers and magazines. Daryl has over 10 years of experience in investment banking, primarily at RBC Capital Markets and spent another 10 years working in an executive capacity, operating small businesses, raising over $50 million in equity and debt financing.

In early 2019 Daryl rebranded his consulting business, expanding resources to include more capital raising and CFO services. Daryl has worked in almost every facet of the financial world, gaining valuable knowledge and insights, which he now brings to the table to benefit his clients. Daryl completed the honors economics program at the University of Western Ontario and is a CFA Charterholder

Daryl also served on the investment committee of Maple Leaf Angels for over a year.

Daryl, welcome to the Sell. My Business Podcast I'm very excited to have you with us today. We've been having a number of conversations, which are exciting to me because you're going to cover off today very important areas in the financial world that most business owners overlook. But before I get ahead of myself, why don't we start with the story behind the story? Daryl, it'd be great. If you can share with us, how did you get to where you are today, and why are you doing what you're doing?

Daryl Ching: [00:03:05] I started my career in investment banking, so I was at RBC Capital Markets and I progressively went to smaller and smaller investment banks, really acting on the buy-side and screening debt and equity transactions for our investors. And what I found was that business owners and investors just speak two different languages.

While a business owner is very good at conveying their passion and their vision and their pain points of their business. You have investors sitting on the other side of the table with a checklist going, did they address competition analysis? Did they address barriers to entry? Did they address regulatory issues?

And I found that a lot of these checkboxes just were not being checked. And that was the main reason why a lot of deals were falling through the cracks. So, I saw a large opportunity when I left investment banking to really jump into the consulting side and help businesses tell their story to raise capital. To put together a proper business plan investor presentation, a three-to-five-year financial model that really checked all the boxes.

As I went into these businesses, I realized that the last executive position that gets hired in any small business is the CFO. So, a lot of businesses operate quite blindly without financial expertise. They operate a lot on the gut and I've started finding that there was a real need for my expertise on the finance side, in terms of helping them with the preparation of their financial statements, for making key strategic decisions that had money and implications to them.

So, that's really how I stumbled upon it. And I started to grow my team and we started offering a full suite of CFO services to small businesses.

Jeffrey Feldberg: [00:04:34] Daryl, that's terrific. And it's interesting in the Deep Wealth Experience where we work with business owners who are looking to have a liquidity event. One of the, I call it the Achilles heel or the blind spot as you pointed out for most business owners is on the financial side. And if we're honest about it all too often, I hear Jeffrey, my good friend or my sister-in-law or the friend of the family is my accountant.

They've been doing the books for years. When I have a liquidity event, they're going to be the ones who are going to save me time and money. They know my company. What more is there to know, and off they go into battle with that. And it doesn't have a good ending. It's like bringing a knife to a gunfight.

Where is it that most business owners, whether it's raising capital or having some kind of liquidity event, maybe you're taking some chips off the table with some kind of an exit or a partial exit? Where is it that most business owners get it wrong?

Daryl Ching: [00:05:28] The most common theme that I see is cash-based accounting versus accrual-based accounting. What I mean by that in the accounting world, when you can put together a profit and loss statement, you should be inputting transactions based on the timing of the service or when services were incurred when revenue was earned.

But far too often, it is very common for bookkeepers to go through a bank statement and just plant transactions through a bank statement. So, to the extent that there's anything that doesn't show up at the bank, whether it's a receivable that's due in 60 days or a payable that was stretched, or you've made a late payment, that was six months late.

That's not going to make its way into the financial statements. So, basically what people are generating is a cash flow statement, not actually a profit and loss statement. And that's the biggest thing. The second biggest thing that I see is when I start looking at the balance sheet. Far too often, I'll ask for a balance sheet, and the business owner more often than you think would have never seen it.

Or they have it prepared by an accountant at year-end that didn't ask too many questions because it was the notice to the reader. So, they don't even know what's in their balance sheet. And the balance sheet has very important information, including any equity that was invested into the company and any debt outstanding that's owed to the shareholder.

Typically, entrepreneurs lend money to their business. And far too often, I see the entrepreneurs. have not kept track of those expenses. So, they actually don't even know what's owed to them, which is an important question for investors. And further to that. If people have invested equity, it hasn't been tracked because these are complex calculations that bookkeepers typically don't know how to input. Bookkeepers are typically good at doing invoices and doing the day-to-day transactions. But these more complex balancing transactions are often overlooked and don't even make their way into the balance sheet. What ends up happening in my experience is that we end up having to go back two, three years to make sure that we can catch all this information back up.

So, that the opening balance sheet is accurate. And this is one of the big reasons why a lot of transactions fall through the cracks during due diligence.  A lot of companies put together solid investor presentations, but what investors are going through the books and doing their due diligence, they see all these deficiencies, and then sometimes they're enough for them to walk away.

Jeffrey Feldberg: [00:07:39] So, Daryl you bring up some terrific points and I can just imagine the frustration of a business owner all that time and money spent taking a company to market only to have it fall through because certain financial reports weren't done or things perhaps were forgotten. But before we move forward, let me ask you a question.

Many business owners will often say Jeffrey, I'm too small to have a CFO. My business isn't a multi gazillion dollar business. A CFO is expensive. It's a big position. really not for me. Daryl why would a business owner who is thinking that be off side and at the same time, why is it, or how is it that a CFO or a service like yourself is actually within reach and affordable?

Daryl Ching: [00:08:22] So, when they say that a CFO is too expensive, often they're correct. To hire a good CFO. You're looking at a price tag of over $150,000 annual salary and for a good one over $200,000. And a full-time CFO is typically not required for a small business.

Having some accounting expertise, whether it is bringing in a part-time controller or outsourcing to a company like ours that provides part-time CFO services is vital because we will set up the books in the right way. The longer that you go with your books set up inaccurately. The bigger, the cleanup, the bigger price you're going to pay eventually anyways, to have your financials cleaned up over multiple years.

The other shortfall that I find as well, is that a lot of business owners have one consolidated set of financial statements for their entire business. So, to the extent that you have multiple products or a couple of divisions with the business that are two separate businesses with two different profiles, they're not being separated out.

And so when it comes time for an exit or even to raise capital. A lot of times we'll investors will look at your two different businesses and value them differently. And they'll say show me the profit and loss statement for business A and business B. If you're unable to do that, then it's very difficult for an investor to make a decision about whether they want to invest in your business and how to value it.

So, from our perspective it doesn’t make sense to have a full-time CFO at a certain stage, but to get the required expertise on a part-time basis we advise everyone to do that right from the outset, just to make sure that the accounts are set up properly and they're not having to do years of corrections at a future date.

Jeffrey Feldberg: [00:10:00] So, Daryl what's interesting and what I'm hearing you say is a business owner can purchase a set number of hours per week or per month or per year. And this way professional advice is being given and all the proper financial structures are being set up. And you're set to go from a diligence side when your time is ready.

 Daryl Ching: [00:10:19] You're absolutely correct. And actually, if I can use an analogy, I'll use the analogy of legal services, which are less required than accounting on a full-time basis, but you don't hire a full-time lawyer, but you should have access to a lawyer should you start drafting contracts, employment agreements.

If you'd have to deal with the termination, you would engage a lawyer to do it. So, the equivalent of a bookkeeper might be a law student. Would you hire a law student to handle a complex termination? You probably wouldn't. You'd probably go to a law firm. So, from our perspective, if you don't have the right expertise when you're doing the accounting, you set yourself up for a shortfall and you set yourself up for the potential of losing business, losing an investor in the future.

And from a liability perspective, misreporting information to investors as well. So, I completely agree with you that, to the extent that you are a small business, having that expertise just for the required number of hours that you need is absolutely essential.

Jeffrey Feldberg: [00:11:18] Darryl in our nine-step roadmap that we have a Deep Wealth, steps number three and four are on due diligence because due diligence is such a large area. We categorize it with the actual due diligence itself then the mindset that you need behind due diligence.

And so what I'm hearing you say is that you don't have to be a large business. You don't have to be spending $200,000 or more on a full-time CFO. You can fractionalize it. And in, so doing you're having all the right structures in place that year over year so that you can go into due diligence with all the information that you need.

Now, I also imagine Daryl that when you're going through a liquidity event, you can also scale up on the number of hours that you're having a company like yourself to help with. Is that correct?

Daryl Ching: [00:12:07] That's correct. So, we are staffed with plenty of capacity in the event that happens. So, we work with small businesses that actually pivot all the time. And so we get requests like, Hey, we know right now we're only doing B2B, but we actually want to explore a transition to B2C. Can your team help us make that decision, do some risk analysis, for example?

So, we'll scale up and we will provide them a quote on the required amount of time for us to assess that decision. So, to help them make that informed decision. And that's an example of something that comes up. So, for us to be successful, we need to be able to scale up and down based on the needs of our business. We certainly make sure that we are staffed accordingly so that we can accommodate a lot of these types of questions.

Jeffrey Feldberg: [00:12:50] And Daryl going back to earlier in the introduction, you said something interesting. You started off in investment banking and you're still in the financial world, but at a different level, doing different things. I would love to hear from your side of things does that make a difference for you? So, looking at some financials or some reports or structures as a former investment banker, what does that mean for you, and what does that mean for your clients?

Daryl Ching: [00:13:15] In investment banking, we were always trained to look at a business from a valuation perspective. How do I max the valuations so that, the presentation to investors is ideal?

What are investors looking for in businesses? And that differentiates me from the typical accountant who went through the CPA channel and only did public accounting because accountants are more geared towards getting the financial statements accurate in accordance to accounting guidelines and following rules.

Because my background is different. I come to a business with a different lens and I come to it with more of a business perspective in terms of what can I do to this business to make it more attractive upon exit? And I'm always thinking with the exit in mind, even if the owner is not planning to sell for years ahead, even a business owner tells me I plan to hold this business for decades.

I'm still looking at succession planning just because that's how I'm geared to think. And so that's one of the differentiating factors for us is always thinking about the fact that at some point there is going to be a maturity date for this particular CEO. They're going to want to make an exit, whether it's three years from now or 20 years from now, and how do I prepare this business so it is ready for success at the maximum valuation possible? And to prepare for that, you need to start preparing well in advance and have this mindset from the beginning, rather than scrambling to do it and trying to sell your business within a year.

Jeffrey Feldberg: [00:14:38] Daryl you are preaching to the choir here at Deep Wealth. That's really what we're all about. And for our listeners what's interesting is when you think about this step number six in our nine-step roadmap, the advisory team working with someone like Daryl, who's a virtual CFO or a fractionalized CFO, whatever that is having Darryl on your team, it's really early on building out your advisory team.

Now you're putting all the right things in place today. And in many ways, Daryl correct me if I'm off base with this. It's like having a crystal ball into the future. When you have all the preparation done on the financial side, it just makes due diligence so much easier, less expensive, and quicker because you've been doing these best practices day in, day out.

Daryl Ching: [00:15:21] I completely agree with you, Jeffrey. And I've been on the buy-side because I've worked for companies that had an M&A strategy. So, I've certainly worked on the buy-side. So, I know the thought process of a buyer. And there's nothing more unattractive than when you make a request to a client. Okay, can you show me your financial statements broken out by the two divisions and they can't do it.

And they say, give us a month to put this together. It definitely devalues the company to a certain extent. I know it's not a quantitative factor, but it certainly is a qualitative factor if they look unprepared.

So, from that perspective, being prepared and having all the information ready. As soon as it is asked by a buyer, you make a great first impression. It shows that you have financial expertise and stability within the business. You've got followed information at your fingertips and all of these things add to the valuation of your business.

Jeffrey Feldberg: [00:16:14] Daryl, said like the true professional that you are. And I know one of the things we work a lot on with our clients at Deep Wealth is on getting into the right mindset for your future buyer. And as I like to say most business owners, the only thing that they care about with their future buyer is the check going to clear at the bank when they have the exit and not anything else.

And we're big proponents of you have to tune into WII.FM let that be your favorite radio station when it comes to your future buyer.  The what's in it for me station. And that's really catering to your buyer's needs your buyer's mindset of what they're looking for. So, Darryl, with that in mind, I'd like you to go back to the times when you were working with buyers who are looking at various companies, what would be some of the typical mistakes that would be don't pass, go, don't get out of jail, that's it. The deal is done. It's finished. Let's move on to another company.

Daryl Ching: [00:17:08] So, I know that there are a lot of more obvious things that people look for in an evaluation. So, obviously, sales, diversification of your sales by customer, how effective your marketing is, but I'm going to move that aside because it's really the intangibles that cause a deal to move forward or fall apart. Far too often businesses look attractive from the outset. Term sheets or sign and due diligence begins.

And the buyers find things through the due diligence process that turned them off and the deal falls apart. I think the greatest intangible is the people. And when I say that, it's the quality of the people.  It's the typical CEO that needs to be part of every decision within the company.

And the typical profile of this business is that it's operated for many number of years, but they're stuck in neutral and haven't been able to break the three to 4 million annual revenue threshold. And there's a reason for that is because a CEO has. Hired people on the cheap. They look for. The lowest salaries possible and negotiate them down to the bone.

And they bring in people that just do and don't think for themselves. So, the CEO is able to continue to make all decisions at the top. And these businesses typically are not attractive to investors simply because one of the things that I ask is if the CEO were to go away and take a vacation or two weeks for two weeks, would this company continue to operate?

And if the answer is no, that's certainly not an attractive business because I have no interest in buying a business that requires three years of transition with the CEO involved. I want one that I can take the CEO out, plug and play, and the company can continue to run like clockwork. And the only way to do that is for a CEO to start empowering their people, bringing in management, people that are critical thinkers, empowering them to make decisions.

So, that, for example, if you are dealing with customers and assigning credit terms. The customer service manager or sales managers should have the ability to assign credit terms up to a certain limit so that the door isn't getting knocked on every five minutes to the CEO asking   if he can approve a term.

One of the things that I gauge is sometimes I've sat in the CEO's office before to have a two-hour meeting. And I count the number of times that the CEO gets interrupted. And I've been in situations before where the door was getting knocked on every 15 minutes. And that to me is a sign the CEO has not empowered people.

This is one response out of many, but this is one thing that investors will pick up on in the due diligence process. When they come visit the office and start doing their tours and talking to people this is one of that things that they're going to gauge. And they'll just walk away from that business, no matter what the valuation is, because it's going to be too much work to do the transition.

So, that's one of the key things that I’ll focus on.

Jeffrey Feldberg: [00:19:56] That's interesting Daryl and for our listeners, just so you can realize it's not uncommon for a future buyer to spend hundreds of thousands of dollars on due diligence. Now, obviously, that dollar amount is going to be dependent on the deal size, but the larger the company, the larger the deal. And the larger, the amount of money that's being spent on diligence.

So, everything under the magnifying glass to see what's working, what's not working. And certainly, Daryl, when you're talking about the favorite question that we have a Deep Wealth does your company run without you? And if the answer is no, you're not ready for a liquidity event, stop the presses. Get the right management team in place so that you're working on the business and not in the business, but let's go beyond that.

What would be some other catastrophic mistakes that you've seen over the years as a buyer that just stops a deal dead in his tracks?

Daryl Ching: [00:20:45] As a family business whenever you have family members in the business, A question, mark always comes up on the buyer side in terms of, is this person really working the full hours and are they really qualified to be here? So, if you have a daughter as your credit managers, but you want to ensure that they have the resume and experience to back it up through the due diligence process. And, we have found quite often that there are unqualified family members sitting in high positions in the business that lack the experience required to handle that position properly. So, that's one of the things that we found. Also related to that is as a family business, a hundred percent owner, you can take liberties on expenses. You can expense a personal car. That needs to be done away with prior to an exit because if your profitability, it has been low because you've been trying to minimize taxes, it makes the business less attractive to a buyer.

And so, if you're in the process of transitioning, you need to be in profit maximization model. What expenses can I cut? Do I have the right people in place? And making sure that you are lean, that you can justify every expense in your business and you've got people in the right seats is absolutely crucial.

And that's where a lot of the shortfalls can be. And again, I know I relate back to people, but we also took just to touch on another topic is financial reporting. And it doesn't take long for a buyer to figure out if the accounting has been done well. And I know that for a business owner, a lot of times when you have the budget, it's so much easier to spend that extra dollar on sales and marketing on IT if you're an IT company. But having said that, at some point, your financial reporting will have to be very strong, especially if you operate two different types of businesses or more or even multiple products, because you're going to have buyers are going to ask you questions about margin on your products the net profit margin on your various businesses.

And the reason why you have to have that information is because if you don't have that information, how do you know if one business is more profitable than the other? It could be that one business is generating a lot more revenue, but you're using 80% more time and effort and spending 80% more resources to keep that business running.

And it might make sense to put your resources into the business with smaller revenue. And these are decisions that you can't make unless you have that information. And these are questions that buyers are going to ask. And if your answer is, I don't know, it becomes an unattractive business.

Jeffrey Feldberg: [00:23:17] So, Daryl it's interesting and you bring up a number of points to unpack. One of them is EBITDA and the normalization of EBITDA. And we hear all these horror stories of how, as a business owner, we have the business as a lifestyle. And so, we put certain things through the business that a new owner wouldn't and for tax reasons, perhaps run the business in a way that we wouldn't.

And so it sounds like somebody like yourself can come in and help optimize that. But on the flip side, I also hear these horror stories of business owners who take it too far. And they do these adjustments that just shouldn't be done. And any future buyer loses confidence. Have you seen that or do you have any experience with that, that you can share?

Daryl Ching: [00:24:00] I do. And I have seen that. We've seen businesses that on paper generates zero profit, but they come back and make an argument that the EBITDA's actually positive $500,000. And I'll throw in an example of a number of expenses that technically could be cut. And if they were to run lean and the bigger, the number, the bigger, the concern, obviously. Now, one of the things that impact the sale of the business.

Also, an argument that comes back from the buyer, usually there's also a shareholder loan where there is money owed to the owner. The owner has put in, let's say a million dollars into the business and expects to get paid back as a loan. The buyer could come back and say It looks like you've taken out $500,000 a year of extra money.

So, we'll just call that loan void as a negotiation tactic that comes back from the buyer and to be mindful of. The bigger difference between your EBITDA and your normalized EBITDA it causes just more questions and it causes more concerns because, at the end of the day, you have to prove that these expenses were actually not necessary.

And then obviously there's the cost of what's the cost to get rid of these resources. So, if there are people, then there are severance packages to be paid out, obviously, and it doesn't make a new business owner have to feel good that you've had people in the business that weren't necessary for the operation. You want that margin between the normalized EBITDA and EBITDA to be as small as possible, typically it's not zero. We understand for family businesses, there's going to be something in there, but the larger, the amount, the greater, the concern it causes for the investor.

Jeffrey Feldberg: [00:25:30] So, Daryl not to put words in your mouth, but what I'm hearing is this. If, in the short term and short term could be a year, it could be five years, but if you're having a liquidity event, the best time to start normalizing your EBITDA and normalizing your financials is today. So, that you can come forward to the buyer with a year, three years, two years, five years of solid, consistent information year in, year out that says, Hey, here's what it is.

Once I'm out of the business, nothing's really going to change other than maybe a few minor items here and there. And you have the history and the proper financials, to back it up.

Daryl Ching: [00:26:05] You're absolutely correct. The most reliable indicator of how a business is doing is their annual financial statement. That's what I look to for performance. And so, if you are able to show me a track record of at least two years of financial history, that shows a certain profitability level, that is what is the most convincing.

That is what I'm going to believe the most. But if you're showing me a track record of no profitability or negative profitability, and you're saying I could be profitable if I remove these expenses, there's a leap of faith there. I have to do my own due diligence and assess for myself whether that is true.

And so anytime there is room for interpretation. You're probably never going to get an agreement on the full level of what the normalized EBITDA should be. There's going to be a negotiation back and forth where you come in the middle. So, why not spend the time now to maximize that EBITDA so that your records show that you have managed to cut those expenses and manage to run the business lean for at least two years.

So, I absolutely agree with you on your comment.

Jeffrey Feldberg: [00:27:08] Daryl, that's great advice.  We've been talking about EBITDA adjustments that can get an owner into trouble. Perhaps being too aggressive or not doing things in time, but I'm wondering Daryl, are there EBITDA adjustments that are often overlooked to a business owner's detriment?

Daryl Ching: [00:27:24] That's a great question. Two come to mind. I'll put one into the bucket of capital expenditures and it's for example, expensive office furniture that was not necessary, but they decided to make the office look nice. So, they overspent on office furniture. It could be equipment that wasn't required.

Nice, shiny machines that weren't required for the business, but the owner just wanted to have this type of machinery and equipment. And we try to add that back. And what that tells the investor is that the business owner has not spent prudently and maybe made some purchases more out of vain.

And so that could be to the detriment of the business owner. The other one is also a type of capital expenditure that we see and that's research and development on the tech side. And often we see tech businesses invest a lot of money into development. And when they come back with their normalized EBITDA, they say a lot of this extra development wasn't really required.

We ended up not using a lot of this for our technology from an operational perspective. And so, it looks like they have over-hired developers and done a lot of development that wasn't germane to the business that wasn't required from an operational perspective. And they try to add that back in their EBITDA.

And so those are a couple of examples that come to mind, Jeffrey, that I could think of.

Jeffrey Feldberg: [00:28:41] That hurts with some of the comments that you're saying, let me ask you this. How could you position it? So, you bought furniture, extra fancy furniture that the business didn't need, but as a business owner, it makes you feel good when you walk in and you just want it to do it. The new business owner wouldn't have done that.

Or perhaps it's, you didn't mention this, but perhaps you have seasons tickets to your favorite sports game, or you like to donate to various causes that a business owner wouldn't do. So, how could you position those kinds of EBITDA normalizations in a way that doesn't negatively impact the overall enterprise value?

Daryl Ching: [00:29:20] So, Jeffrey, I think, obviously any buyer understands some of the perks that business owners enjoy, especially if they own a hundred percent of their own business, they're free to do what they would like with the business. Now having said that, I think we mentioned earlier that if you are preparing for a sale, then it is time to start scaling back some of these purchases that are unnecessary, and even from a CapEx perspective, if you were to stop the development, stopped buying the furniture as time passes, they depreciate further, and  begin to have a less and less of an impact on your balance sheet anyway, but really it's just to explain that some of these purchases were extravagant at the time Given other investors were involved or given that, preparation for new owners, you wouldn't have gone ahead and made that purchase.

And just having that dialogue that obviously the business would be run differently on a go-forward basis, had they brought in an investor in earlier. But it's really just the communication aspect of being upfront about it and minimizing that as much as possible when you know, you're about to for a sale.

 Jeffrey Feldberg: [00:30:23] Daryl, this is fascinating.  I share this throughout the Deep Wealth Experience. When it comes to your liquidity event advisory team, my favorite saying is that when the team works the dream works. And what you're saying here is just gold, because you could go to your accountant, I'm looking at buying this furniture. I'm looking at being extravagant here or extravagant there. And the advice that you might get is you know what? That's okay. It's a business expense. It's going to lower taxes. I'm good with that. Go ahead and do it. But if you're involved early on, it would be a very different conversation. While you could do that, but it may hurt you when you're looking to have a liquidity event with your future of buyer who may look at that, in a negative way. You may want to think twice about doing that.  It's a tension maybe a little bit of a tight rope between the advice that an accountant might give and the advice that a CFO or in your situation, Darryl, that you might be giving, how do you work with that?

Daryl Ching: [00:31:19] At the end of the day, the most important question is what's your goal? So, for a business that has no intention of selling, they want to keep it a tight ship, family business, a lifestyle business. That's up to them and maybe the way that they operate suits them perfectly. But if I hear companies say we are preparing for an exit and I'd like to retire in three years, or I'd like to sell the business in three to five years, that's a different discussion.

And the tax implications and preparation for a sale, actually conflict with each other. Because some of the advice that we give. Obviously results in more taxes because we're raising the profitability of the company, but I say this is necessary if you want to sell your business. So, they are in conflict with each other, the goal of tax minimization and the goal of selling the business.

And, I'm, I don't think as much like an accountant than I do as an investor slash business person. And so, my mind is always geared towards how do I make this business more attractive for sale? And if they tell me that their goal is to sell, then this is the advice I will give. But if they're, as they tell me their goal is to just to maintain a lifestyle business for two decades, then they don't need this advice and I wouldn't give it.

Jeffrey Feldberg: [00:32:30] So, Daryl what you're sharing with us, it's a little bit of a bitter pill where, Hey, if you want to maximize your value in the long-term, the not-so-great news is that in the short-term you're paying more taxes because you need to show the profitability. It can't just be, I believe it's going to be this.

It needs to be, I know it has been this year over year, here's the financials they speak for themselves. And that's something of tremendous importance. So, the takeaway here is that there's a little bit of pain in the short term, but that it's a rounding error in the long-term when it comes time for your liquidity event.

Daryl Ching: [00:33:05] When you are showing zero profitability and you say, but normalized EBITDA, I could be profitable. I could have a million dollars of profit. It's a leap of faith. And it's very difficult for an investor to determine whether that is true or not. And so, the proof is in the pudding. So, you're absolutely right that the objectives are important in terms of what are you trying to achieve.

And it is a bitter pill to swallow, but in the long run, this is the absolute best way to maximize the value. Valuation is usually based on a multiple of EBITDA.  Depending on the industry, you could be selling your small business for six times, EBITDA for 10 times EBITDA, and some of the scalable sectors like technology could be 20 times EBITDA.

So, your exit could potentially be, let's just call it 10 times your profit, and therefore every dollar of profitability matters because you multiply that by 10, that's the impact on your sale. So, you're absolutely right. It is some short-term pain for a huge long-term gain in the future.

Jeffrey Feldberg: [00:34:03] Some terrific advice and for our listeners, if they remembered nothing else, other than that one point, that's a huge one to be taking home back to the business, thinking about it and positioning yourself. Daryl, I'm wondering when you come into the scene and you begin to work with a new business, what does that look like for the first 30 to 90 days?

What are you typically doing? What are you setting up?

Daryl Ching: [00:34:23] I would say the first two weeks is actually determining scope. So, we do have a scope based on conversations. And the scope often changes because I discover things as I go in there. And so typically I'm hired for capital raising purposes. The number one reason why we get hired in the first place is for companies going for their series, a equity financing, where they're raising anywhere between three to $10 million of growth capital to really commercialize and grow their business.

I will see deficiencies. I'll see deficiencies in the financial statements to which I say, okay, we're going to have to expand the scope. I'm going to need to bring in my team to go back and clean up two years of financial statements. As a result of this, we're going to have to separate your financial statements so we have a P& L by division. While I'm in there, I start getting questions that didn't come up in our original conversation when we were discussing the engagement. A CEO is always thinking about new opportunities about new revenue streams, about whether they want to move from B2B to B2C. Whether they want to move from white labeling to putting money into their own product.

And as these questions come up, more requirements for analysis come up. And so, we scale based on the needs of the client. And, there's an evolutionary process where even though we came in quoting one fee, our fee could be very different in three months because we've expanded the scope for the company, or it could be the reverse.

It could be, there was a massive cleanup required, but once all the processes were set up, everything's running smoothly enough that we can drop our bill tremendously after three months. Typically, I would say that there is a lot of groundwork to be done in the first three months where we set up processes as much as possible.

We try to empower their staff to be able to carry out these processes so that they rely less and less on us on a go-forward basis. And so, the most typical engagement would actually be a few months of upfront work that's a lot of heavy lifting. And then it would taper off and move into just day-to-day monthly processes on a go-forward basis on a smaller fee with the caveat that the fee can go back up if the business is in transitions and pivots and looking for different sources of revenue.

Jeffrey Feldberg: [00:36:33] That's interesting Daryl and I'm wondering, as you're talking about how you're setting various systems up in different kinds of reports, how do you interplay with an existing accountant or an accounting firm or a bookkeeper? What does that look like? Do you all play in the same sandbox or do changes need to be made?

Daryl Ching: [00:36:52] To the extent that there's an accounting firm we would have to replace them. So, you can't have two cooks in the kitchen when it comes to accounting firms, because one firm ultimately puts together annual financial statements. If for example, they had the accounting firms doing all their accounting and they asked us to do the annual financial statements, we'd have to go through all the information again, anyways. So, it doesn't make sense for one accounting firm to do all the bookkeeping and accounting and have another accounting firm bless the financials at year end. It's just a process that doesn't make sense. So, we typically take over accounting from accounting firms.

Now having said that we don't have to take over internal staff. So, to the extent they've got a bookkeeper that they're happy with, or even accounting manager that they're happy with. Sometimes it's just a matter of us training that individual to make sure that they are booking things properly and setting up processes and educating them so that they could do the job on a go-forward basis, which relies less on us.

So, from that perspective, we work a lot with internal people, and sometimes we even have firms that say, I'd like to have more internal control over the accounting. Daryl can you help us hire in a controller so that they can work with you? And then we would engage you more on a high level from a strategy basis.

Maybe we engage you every quarter to review our financial statements and give us advice of how to move forward based on the margin analysis that you've put together. So, there are different ways to work with clients. And that's why it's funny because the most typical question for a new client is what's your fee?

And I say, depends. Because we've worked with clients in so many different ways. They have so many different preferences on how they would want to work with us. And we are flexible in every way possible.

 Jeffrey Feldberg: [00:38:34] Now Daryl, speaking of being flexible, as we record this podcast interview, we're still in the midst of the Coronavirus and this pandemic every day, it's changing history and life as we know it what's it been like for you over the past while with the pandemic, and as you look to the days, weeks and months ahead, what do you see as it pertains to your business?

Daryl Ching: [00:38:56] Jeffrey, I had a minor panic attack on March 15th last year, because a lot of our business was actually capital raising during that time. We were taking a lot of clients for series of financing with VCs, with angel investors, and with private equity firms. And that just stopped dead in his tracks.

Investors weren't even returning phone calls. So, I became actually quite worried about the business because all of that business just stopped.  I was able to pivot my business. And in particular, we started looking into the government relief programs and we started educating ourselves on all the various government relief programs.

And we got very good at understanding those programs. And we pivoted our businesses to provide consulting on how to get assistance from government relief programs. Now, one of the kickers that actually helped our business was the fact that for a lot of these programs to work, you actually have to be in good standing with your financial statements up to date.

And a lot of companies didn't. So, when they went to apply, if they hadn't filed their taxes yet for last year, they didn't qualify. So, we actually had panicked customers that came to us and said, how fast can you catch up with my accounting?

I haven't filed my taxes this year yet, or I haven't filed in two years. And we actually got quite a bit of business with people that now had a requirement to do their annual filings when they didn't really have a reason to do so and keep them up the date in the past. The other thing that it was interesting for our business is, I consider myself an old school guy where I think, a face-to-face meeting is the best. We only service   clients if we can go to their office and meet them face to face. We often spend at least one day at a client site for each client and all that changed. All of a sudden, we migrated to Zoom calls. We migrated to more phone calls. We migrated to technology platforms that allow us to communicate better.

And we were all of a sudden able to operate CFO services without going onsite. And that was a game changer for us because now I knew I could expand my reach and since then we picked up a client from the UK and we were able to operate a lot more effectively. On the business development side, because we're now resorting to Zoom calls and I'm not having to drive to three different parts of the city.

I can actually do five, six business development meetings in a day whereas I was used to be constrained at two or three in the past. So, there are benefits to what we're doing. Obviously, there is the loss of the human touch, which I miss very much. I miss being in an office and being able to turn around to my colleague and make a joke or come sit by my computer.

Let me show you what I'm working on. Obviously, you can't do some of those things anymore. So, some of the training aspects have been lost. But there are positives that have come out of it. I think there's been more of a requirement for people to actually get their numbers up to date, to get their financial statements up to date.

But we are seeing still a lot of business. The investor markets have opened back up. And in fact, investors are now rewarding companies that have successfully pivoted through COVID.

So, to the extent that you are able to find a new revenue stream for your business to address COVID or you were able to cut your expenses so that you were able to hunker down and survive through this period, this has been a true test of adaptability. And so, we are seeing a lot of capital raising business coming back ever since I would say July last year is when they started to come back and we started doing more capital raising engagements.

So, our firm is actually quite busy through this time. We've been able to retain clients that have successfully pivoted and we've picked up new ones. So, it's been decent for us.

Jeffrey Feldberg: [00:42:28] Darryl that's terrific. And congratulations with that. A true testament of how there's always two sides to a coin. And yes, the pandemic has brought with it. A lot of negative things. At the same time, new opportunities have now arisen, and you're able to pivot your business to go into areas that you likely wouldn't have done before.

So, it never ceases to amaze me. When you see the flip side in a good way of what a negative situation can bring in, actually turn it into a positive one. So, Daryl as we begin to wrap things up here, there's one question I like to ask every guest who comes on the podcast. And here's the question for you.

I want you to think of the movie Back to the Future and in the movie Back to the Future there was the DeLorean car.  The DeLorean car could travel back in time. So, imagine Daryl that the DeLorean car is now outside your door. You hop into the car, you can go back to any point in time that you want, but specifically, you're going back to a point in time when you can speak to the younger Daryl. It could be when you're a child, it could be when you're a teenager, when you're a young man.  What would you be telling the younger Daryl?

Daryl Ching: [00:43:35] So, Jeffrey, I think, probably going to play a little bit on that cliche of you can be whatever you want to be. But shortly after university, I remember graduating from university and entering the workforce at RBC Capital Markets and there are lots of people around you that always give you advice.

And there's a lot of people that give the conservative advice of there's no way that's ever going to work. No, you shouldn't try that. Stick to a stable job because at the end of the day is the pension that matters and don't take risks and so forth. And one of the things that I learned throughout my career was that anything's possible.  If you want a sponsorship from the CEO of Manulife, you can find a way to reach that person if you are aggressive enough.

And I go back to the notion of when I was getting a job at RBC my first job as a teller actually, and this was the, one of the things that I was proud of was that I was applying through the regular channels. And back then it was faxing resumes. And I wasn't hearing back and I said, I'm going to try something different.

I'm going to walk into a hundred branches with my resumes in my hand, asked to speak to a customer service manager and tell them they need to hire me. And people are like, oh no, you'll piss people off. They'll get mad. They'll get mad about that. You're interrupting their operations. And I didn't listen.

I did it. And the way that I looked at it was, what's the worst thing that can happen, a rejection. They say, no, they asked me to leave the branch. And to me, that was a rejection that I could handle. And so, I decided to go ahead and do it. And I got my first job at RBC is a teller by using that approach.

And somehow, I think, later on, I lost my way and I started listening to people again, and I started pulling back and I started going, okay, maybe I shouldn't take that risk. And what I would tell myself is for those people that are telling you, you can't do it, that is not possible, try. And if it doesn't take.

Too much effort. You don't lose years of your life trying something. And the worst-case scenario is a rejection. Go do it because at the end of the day if the rejection is the worst-case scenario, then it's always worth the risk. And I've taken this with me, into my business with Vistance

People telling me you'll never close that client. They're too big for you. Don't bother wasting your time. Stick with the small businesses. And I've managed to surprise myself and get businesses with $50 million of revenue, even though best practices, tell you that businesses with $50 million of revenue, will already have a capable CFO and processes in place.

They're not going to need somebody like me. And it surprises me everyday businesses, medium and large that still need my expertise and actually could really use some advice on improving their processes and their financial reporting. It's Daryl believe anything is possible that there are no limitations and don't listen to the people that tell you that you're wasting your time.

Jeffrey Feldberg: [00:46:24] Darryl what a wonderful story and terrific advice. Thank you so much for sharing that. One other question and I will put this in the show notes for all of our listeners. Where can somebody find you online? What would be the best place for somebody to look?

Daryl Ching: [00:46:38] They can email me Daryl [dot] Ching [at] vistancecapital.com. They can go on the website, www.vistancecapital.com, or they can find me on LinkedIn. I'm connected with a lot of business owners. I've put out a lot of different blogs on different topics related to finance, relate to HR-related to some of the discussion points that we had today.

And so, there's plenty of reading material there as well on my LinkedIn profile. It's Darryl Ching and happy to connect with any business owner that just wants to have a chat. I never turned down a phone call with every business owner. I think it's always worth having at least a 30-minute conversation to see if there's a way we can help.

 The conversation is always worth having. And then even if there is nothing for us to do today, there could be something for us to do in a year from now in two years from now. Entrepreneur to entrepreneur, always looking to connect with like-minded people.

Jeffrey Feldberg: [00:47:26] Spoken like the true entrepreneur that you are. And again, for all of our listeners, that will be in the show notes. Daryl, thank you so much for taking time out of your day today to be on the Sell My Business Podcast. Really appreciate all the gems. Of wisdom that you shared. As we look to close out the podcast, please stay healthy and safe.

Daryl Ching: [00:47:43] Thank you for the opportunity. I enjoyed our discussion today and look forward to many more in the future.