Latest / Exit Algorithms / Turnaround Expert: The KPIs, Cash Flow Habits & Exit Gaps No One Talks About | (#58)
Transcript
- speaker-0: Welcome to exit algorithms, the podcast where we decode what it really takes to unlock growth, streamline operations, and prepare your business for a high value exit. I'm your host, Pete Vera. And today I'm joined by Yoav Cohen. He's a certified ⁓ &A advisor with over 25 years of CFO, COO, and CEO experience across startups, fortune 500 companies. and turnarounds in more than 40 different industries. He's a managing partner of NYC advisors and a board member and partner at Stark Office Suites. Yoab, so excited to have you here today. Welcome to the show. speaker-1: Thank you. Thank you for having me. speaker-0: Yeah, can't wait to get into this conversation. Yeah, can we start off? Can you share a bit about your background and business journey? I'd to hear your audience to have a little context. speaker-1: Okay, sounds good. So I started my first of all, I did my BA and MBA at Baruch College here in New York. the I was working full time and studying full time, but finished on time. I then had started my career banking. I was at Citibank for about five years as a controller towards the end of the controller, the investment banking division. ⁓ Then I moved to Bankers Trust. I was there for I think three or four years, also as a controller and towards the end also at the Investment Bank. And then I was recruited to be a CFO of a public company, a pharmaceutical public company. And that was really my really the first turnaround when I was interviewed and although it was public, it seems to be in good shape. But when I started working there, I found that they're to lose money in the first quarter that I was there. They had operations around the world in Canada, US, and Israel. Within about a year and a half, we're able to turn around the business. Then I moved on until 2000, was CFO of public and private companies. mainly doing turnarounds. And then I spent two years at a incubator company that started technology companies. around, I think it was 2002, 2003, I started my own company, NYC Advisors. And we concentrated mainly on turnarounds, working with distress companies. And in the last, since COVID actually, I had the opportunity to prepare companies for sale. So I started also working on exit planning. speaker-0: Nice. Yeah, I love that broad range of experience. I'm sure that comes in handy as you work with businesses. speaker-1: Yes. Yeah, I'll tell you that many times when I'm talking to a potential client, they ask me if I have experience in their industry. And sometimes the answer is yes. Most of the time the answer is no. But what I tell them that I do bring to the table is really experience of taking good practices from one industry into another industry. So I think that the broad experience that I have across so many industries is really helpful. because most of the issues that I face for companies that are in distress are finance and operation, which is my skills. prepare companies, I do have the broader experience of working and them on doing their internal due diligence, covering everything ⁓ and filling the gaps with their expertise. Other experts, for example, if something is missing in legal, We speak to their attorney, something missing in HR, HR and so on and so on. I mostly concentrate on preparing on the finance and the operations side. speaker-0: I see. Yeah, no, that's great. Yeah. And you, ⁓ do you step in and serve as the interim, like CFO or does it just depend on the situation? speaker-1: really depends on the situation. Most of the clients that I work with on there are distressed companies are referred by their lenders. And so I come in as a yoav, not is not as yoav as CFO or COO and stay ⁓ until the company and start making money. The most important thing is really that they are cashflow positive, which really helps them finally with their lenders and vendors and so forth. So yeah, the answer is that ⁓ of the time I'm coming as an interim executive and help them get back to profitability. Yeah. speaker-0: I see. Yeah. So when does a business an interim ⁓ it, is it when they're, you know, they're in a distressed ⁓ they're needing a drastic change in their business or when, when does that work better than say, you know, a fractional executive model? speaker-1: Alright, so let me first explain what a fractional, let's say fractional CFO. It's is for companies that do not need a full time CFO, so they hire a fractional CFO and based on the needs, the fractional CFO can be there once a week, once a month, two days a week and so forth. And it's long term. Commitment by the company. In dream. is usually when there is a of distress, which is really what I do. But there are times that companies hiring an interim, ⁓ say, interim C executive, when ⁓ need expertise that their executives do not have, or need expertise, let's say the CFO left, and they immediately somebody to continue the work while are looking a permanent CFO. My expertise is really when there is a crisis and I step into, as I said, stabilize the company and move them forward. speaker-0: I see. And then once you of turn ⁓ around or get the ⁓ where you want them to be, then what's the next step? Do you pass it on back to the ⁓ or? ⁓ speaker-1: Sometimes I help them in some cases I help them hire a full-time CFO or a fractional CFO. It depends. Once they are ready, there may not be again a need for a full-time CFO. And move on and they move on. speaker-0: Yeah, got it. Okay. So what do you typically see? Are there some common issues that you find when you do the turnaround and what are some of your first steps? speaker-1: So the first step is, as I always say, explain to my client is I want to talk to everybody, meaning all the departments. So I go in ⁓ speak the, ⁓ let's the sales and marketing, the operations staff, the finance staff, and the people who deliver the product or the service. Many times when I speak with the owner or the CEO, they tell me what they think the problems are, but this may be symptoms and the problem may lie in another area. And so once I do tour, can take a couple of days, can take a week, depends on the time and so forth. And during this process, I start making a list of what I think the company to be. ⁓ focusing on. By the way, many times I hear an issue from an employee and even a good solution. And when I say, why wasn't this implemented? Nobody to the employee. So when I come with my recommendation of what needs to be done, I'm not saying who told me that, but I'm saying it's coming from the employees. I don't want to embarrass the employee and or the management. But many times the owners really fail to listen to their employees, which is a shame. But moving on, so ⁓ I have the list, we start implementing. I can say that most of the time, the company doesn't have a good cash flow management. The banks like a model called 13-week cash flow. So I implement it as needed, not every time, but as needed. They many times they don't have a budget. So you wanna have a budget, you wanna set goals and you wanna measure yourself, which that's where the KPI are coming, key performance indicators. And so I help them set key performance indicators. Each company is different. Obviously on financials, it's really easy in a way you wanna look at AR and AP and cashflow and so forth and so on. But on operation, it depends on the operation of the company and you wanna find out what are the measurable things that they need to measure against. and start working on implementing and measuring. Many times the lack of internal controls. The employees are not, they don't have a process, they don't have a written process. And so I to with that and set the internal controls that are very important. And I would say another item is measuring cost. And I can say a quick story. I was with a company, really more as an advisor, they were doing well, ⁓ they wanted to do better. And I was there. And kept telling the owner that we need to do a study of the cost by product. There are many, many products. He pushed it and pushed it. And finally, I think two years later, we decided to do it. And I showed a I found something very disturbing. I think the company at the time had about $70 million in sales of which 6 million they were losing money to with whom their best customers. And he basically said, you know, every time the customer calls and he wants a discount, I give him a discount, and I give him a decent I give him that. And at the end of the day, over the several years, He was losing money with his best customers and making money with others. So shows that you really need to be on top of things. You need to measure the cost at least once a year. And when you make a decision to give a discount, you have to sit and do the math and see whether you're still making money or not. So that's, I think, a good example of lack of measurements and internal controls to implement something like this. speaker-0: Yeah, no, great example. Thank you. I think that can home for lot of business ⁓ owners speaker-1: I'm sure, I hope so. Let's put it this way. speaker-0: And you mentioned, you know, not listening to employees as one of the reasons some of these businesses end up just in this distressed I find that really insightful. Is there other reasons or ⁓ would you that is the top reason or what? ⁓ speaker-1: It's not the top reason, I think that, you know, tell you what I usually do, including two days ago when I went to visit the client. I explained them ⁓ that providing to their lender, whether it's cash flow, budgets, whatever, it's really for them. It's not for the lender. The case that I that I had a couple of days ago was I'm working now for a lender, helping one of their clients to come up with ⁓ weekly cash flow, 13 week cash flow. And did not get the right information. We ⁓ sometimes didn't get the backup to the information. ⁓ And told the owner I said, if you look at the if you look at the cash flow of three weeks ago, you will see ⁓ that the over advance that the bank gave you disappears by the end of April, and then you have a lot of cash after April. And that obviously is incorrect. did it happen? Because the information we got, we received ⁓ not accurate. And CFO of the company did not pay attention. So ⁓ I showed exactly what we need to do. And I believe that ⁓ understood by the I left, that the cash flow is for them to manage the company better, to check on when the sales are going to occur, to do all the things that ⁓ needs to do in order to manage the business. Yes, and then give it to the bank, right? But ⁓ is the first thing is to manage your business. And I I had pretty good success. It sometimes takes a week or two or three or four ⁓ when I'm coming as an interim to show the owners that their interest at this point align with the bank's interest. It should not be a ⁓ showdown. Why? You as a business owner, want to pay the bank, they want to get paid. 99 % of the situation that I deal with, the owners have personal guarantees. So you don't want the bank to go after your house or whatever you gave as ⁓ cash ⁓ ⁓ policies or whatever. So your interests are aligned. Once they understand that I get a lot of cooperation and I think it really leads to very high rate of success of turning around, then ⁓ the end of the day, they benefit from it. So that's the long story here. speaker-0: Yeah, no, that's definitely helpful. Yeah. Do you see other like common mistakes? Is it, is it just a lack of systems or, ⁓ know, oversight on metrics, KPIs? speaker-1: It's really all of the above, know, you don't really get into trouble with one issue, unless it's a sales issue, it's a marketing issue. That's not my forte, but from my 20 plus years experience working with distressed companies, it's mostly all of the above. They really don't have a budget. They don't have a KPI to measure. They don't have written policies. Again, case is unique, but the common thread is ⁓ of budgets, cash flow, ⁓ and so forth. ⁓ speaker-0: Yeah, that's helpful. Yeah, okay, so say you turn around a business, it's going great, another few years later, they're gearing up to ⁓ they wanna exit. What are ⁓ some to maximize their sale value if ⁓ they say they have a two, three year runway before they're gonna exit? speaker-1: Yeah. So first of all, I want to just emphasize that the exit is not just for businesses that turned around and now they want to exit. is now, there's a lot of business now in &A for small to mid-sized businesses of owners that are in their 60s or even 70s, and they just want to retire, they want to sell. And so there's a of business like that that I'm working with. But ⁓ to your question, in order to increase the value of the company, first of all, you need to do all of the above. Everything we just spoke about, you want to have. Because it will increase the valuation of the company. Why? Because you presumably pay the attention, your EBITDA is higher, your cost is down, and so on and so on. And that's really, these are the drivers of the valuation. There are some businesses that are sold based on revenue, but most businesses sold as a multiple of EBITDA and each industry is different. You can have two times EBITDA, 10 times EBITDA, that depends. But in order to have EBITDA and a good grip on your numbers, that's really what's important. And I'll give you another example I was helping. just preparing a company for sale, they're profitable. And I also helped them, I wouldn't say negotiate, but provide the information to the other side, the due diligence team, finding answers and preparing whatever they asked for. But they asked for KPI. No KPIs. Now you cannot make it up in a week, right? And they sold in a good price, whatever they expected and everything. it was, I kept thinking that if they have KPI and if they were measuring and they were showing more discipline, they probably would have gotten more. Why is that? Because if the buyer asked for it, presumably they also measure their business. So they say to themselves, ⁓ okay, it's profitable. But we will have now to spend more time implementing more policies, more practices, internal practices, internal control. So we're not gonna pay for what we're gonna do. again, business can be solved very nicely, but the more you keep the ⁓ KPI, internal the cashflow, ⁓ you... you show that you manage the business well, the value is higher than a business that is profitable but not managed well. speaker-0: Yeah, that makes a lot of sense. Do you see any other factors that might kill otherwise ⁓ successful ⁓ It down the value a lot. speaker-1: So there are many factors and I can give you one example, which is to me, it's amazing. I don't think that in my entire career, ⁓ I was helping to sell a company, but even when I come to look at distress companies, one of the things that I do is I look for example, if they're registered in all the states that they do business. Many they're not. or if they pay sales tax in the business in the area in the states that are doing business, many times they are not. And so what happens is if you don't fix it before the due diligence, buyer will have to fix it or may not buy it because if you did not pay sales tax in many states, ⁓ ⁓ want to take the risk. They may buy as an asset sale. They may do other things, but the value goes down. I can tell you again, a quick example. was helping a few years ago, a company and I did the due diligence and did this check. And I saw that they do business in Illinois. went and checked. They're registered in Illinois, but for seven years, they didn't pay the annual fee. Now in many cases, you just pay a little bit more and it's, you know, and you pay a little extra and you solve the problem. In Illinois, I had to hire an attorney to help us figure out because every year they wanna see the number of shares and the profit. And basically it was a whole thing and it took a lot of time to resolve. And it really derailed the timeline. At the end they didn't sell, but not just because of that. But... There are things that are very important and you need to pay attention to it. And unfortunately, lot of businesses don't. speaker-0: Yeah, And they'll have the shock when they come to, ⁓ you to due diligence and realize. ⁓ speaker-1: Exactly. So when I come in, if we have two to three years, and I think this is the best time, somebody thinks, the owner think, I want to sell it two to three years. I don't need to be there three years. I need to be there initially to do the internal due diligence, finding the gaps, and then they have time to fix the gaps. Two years or three years, many times they can fix it quickly. But another thing that they can do, is I help them increase the valuation by looking again at how do we increase profitability? How we should exit the business that you don't make enough money and diversify to get another, to business that's gonna need more money. Companies of a certain size preferably should be reviewed versus not being reviewed. So, ⁓ or audited reviewed. three years, you have enough time to be audited to or reviewed two three times, which is what a buyer is looking for. These are things that if you know two to three years in advance that you want to sell, I highly recommend hiring somebody like me, someone else, but to really prepare. In my case, I usually get the referral or the introduction by an ⁓ &A group that was hired to sell the business. And they see that they're not ready. And usually it takes a couple of months and I prepare them and the process continues. it takes a little bit more, but very important that when the due diligence process starts, you're ready and you don't have any excuses. speaker-0: Yeah, great, great advice. Thanks, Yoav. Yeah, I like your perspective because I ask a lot of guests this question. And I get the typical, you know, owner, owner dependence, customer concentration, those kinds of answers. But you're, yeah, you provide a unique perspective and I appreciate that. Yeah. And another theme of this show is, is AI and technology. I'd love to hear from your perspective. You know, how, how are you? speaker-1: Thank you. speaker-0: using AI today, or how do you see it affecting your industry? speaker-1: I'm not a good example for that. I can tell you that I'm using chart GPT, Pager Chart GPT for analysis, for finding information. But I do attend a lot of webinars, seminars, ⁓ and learn more in order to help my clients ⁓ implement as necessary. I can tell you that I was recently at an XPX. It's an exit planning networking group. And had an expert who told us about Claude. And he said, you gotta get Claude. You pay a hundred dollar a month. This is the best AI ⁓ today. You it may change. And he ⁓ asked for from the participants. What do they need? do they lack in information? So one guy said, well, I'm going to meet with a client that sells widgets. What I want to be prepared for that. put some, talk to Claude. He got tons of information, including information about the company and what they need to do. I was in another seminar where BlackRock said that they use AI. ⁓ and what helped them, it helps them do much many more deals. Why? You get a great example. He said, if we decide to invest in a company, it usually takes our team about four weeks, four to five weeks to put the story together. And then it has to go through four different committees until it's approved. Now it takes a few hours. to prepare it, it goes to the committee fast, whether it's approved or not, it's not the story, but that enables them to do many more deals. that's a great example of using AI for investment purposes. Another he gave is that they devise ⁓ something the AI that when they speak to a prospect and they what they need to do or what they wanna do and so forth, they... ⁓ put it during the call in their computers and getting within 10 minutes, they have a model that helps them ask better questions and make faster decision whether they want to continue or not. So I do encourage everybody to go and take a look at AI, see how we can help your own business and how we can help the business of your client. speaker-0: Very smart. Thank you. Yeah, that's great examples, use cases. I imagine it helps analyze data ⁓ your line of work and help clients determine those KPIs ⁓ and those well. ⁓ speaker-1: I'll give you a quick example. Last year, I worked for a distributor of food. ⁓ told me that they think they could sell more ⁓ restaurants if they knew the ingredients of each of their dishes. So I went to my friend, Chad GPT. I two or three menus from different restaurants that they sell to. And lo and behold, we got the ingredients. It may not be the exact ingredients, but I would say it's probably 80-90 % of the ingredients. So now they have a tool to go to the restaurant and say, well, we know you are using these ingredients, we sell them. And so you can increase your offering by preparing with AI. You don't need to go to a restaurant and ask them, you know, what are your ingredients and so on and so on. So there are lot of applications that people can use AI to. enable increased sales or save money and so forth. speaker-0: Yeah, awesome. Well, thank you for your perspective. I know we're coming up on time here, Joav, but I always ask guests this at the end too, if you could leave listeners with one practical takeaway to protect their company's value, what would that be? speaker-1: I mean, I would say broadly, the takeaway is to do everything that we discussed. There's no one thing, right? You need to have internal controls, you need to have a budget or an KPI in order to measure yourself. You need to have written processes and so forth. The issue really how to prioritize. So written processes may be less important initially. than increasing profitability and so forth. But everything that we discussed is important. There's not only one ingredient that you can implement and your business much, more valuable. speaker-0: Yeah, yeah, I think there's a lot of takeaways there. I like ⁓ listening to ⁓ employees. That a big one for me. And then having those KPIs in place so you can measure and track where your business is going. speaker-1: Exactly, exactly, yes. speaker-0: But yeah, thank you so much, Joep. It's been an incredible conversation. Where can listeners find you and learn more? speaker-1: So they can go to nycadvisors.com and the website has some use cases, has some blogs. I think they can learn a lot and they want to talk to me by all means. email and the phone are on the website and they can reach out to me. Again, it's nycadvisors.com. speaker-0: Great, I'll leave that in the show notes.