About Nonprofit Boards and Fundraising

Many of us recognize our obligation to give back to our communities by assisting various nonprofit causes, and one of the best ways to do that is to volunteer to serve as a director on a nonprofit Board for a cause that you feel strongly about.

  • You get to personally use your expertise to advance the cause you believe in, such as a CFO guiding the agency’s financial staff to produce more useful reports,
  • You can get an opportunity to directly serve the population you are supporting, e.g., serving food in a soup kitchen, wrapping holiday gifts for underprivileged children, etc., and
  • You can contribute money to help the organization support itself and serve more people.

And there’s where it can get sticky.

Most well-run nonprofit organizations choose their Board candidates carefully, and vet them through interviews with agency management and other Board members, such as a nominating committee. There is, or should be, a give-or-get policy that sets a target for Board members in the money contribution department. Every Board member is asked to make an annual contribution that is meaningful to them (the “give), and to encourage others in their personal or business network to give as well (the “get”). This is a sound way to raise money, to ensure Board members feel sufficiently committed to the agency to support it with some of their cash, and for the organization to be able to say to foundations and other potential donors that their Board is 100% financially committed to the agency. All good. As long as we keep in mind that a Board of Directors is primarily about governance.

The sticky part is when a nonprofit organization feels so strongly about financial support from its Board that it populates its Board with big givers who are not interested or qualified for the governance part of the job. One seasoned Board member wrote an article in Directors & Boards magazine that said it pretty well:

“Nonprofit boards that need to be heavily involve in fundraising, i.e., ‘doing’ rather than just ‘overseeing’ (can) automatically commit a cardinal sin of governance. Rather, they should just make sure that their governance does not suffer as a result, such as by automatically populating the board only with large donors who may not be qualified for or interested in governance.”

Sometimes large donors want to be honored for their financial support, and to them that often means a seat on the Board, even though they have no intention of being actively involved in governance. In some agencies the “give-or-get” is quite high, and the real message is “give-or-get-or get out.” That can often exclude from Board consideration a candidate whose expertise would greatly benefit the organization, but whose financial condition would not enable a large financial commitment. Instead, I submit, organizations should find a different way to honor those generous donors, and keep the Board focused on governance – looking, listening, asking the questions that will make agency leadership better as a result. To me that means going first for the skill set and second for the wallet. Governance in the nonprofit world should be interpreted just as it is in the for-profit world: using the director’s expertise and experience to help the organization achieve its mission.

My fellow Board members have heard this before. Nonprofits, this blog’s for you. Need a better governance policy? Give me a call.

We are Your CFO for Rent.

A CFO’S View of Private Company Valuation

If you read any of the hundreds of articles on the topic of valuation of privately owned companies, you’ll get a laundry list of important but often esoteric measurements that your investment banker will quote to tell you what they think your company might be worth. Your head will spin as you try to translate all that jargon about ratios, metrics and multiples into the kind of action you should take to make your company more valuable. This blog from a career CFO is simpler and more direct, and hopefully more helpful if you’re thinking that time may be approaching. By the way, if you think your time is now, no need to read further – you’re probably already too late.

So here, in my opinion, are the things you want to be able to demonstrate when you start the exploration. And I really mean ‘demonstrate’ because talking about how great tomorrow is will get you nowhere unless that great tomorrow is a clear continuation of what’s happening today.

  1. Profit. Duh! You must have a pattern of profitability over the past 3 to 5 years that is based on steady growth of the business, not one-time events or home runs that aren’t a normal part of your business. That doesn’t mean you can’t have a loss year in there that can be explained away by an anomaly, e.g. COVID-19, but you only get to play that card once. You want a buyer to see potential for future profits based on the business you’ve built.
  2. Top line growth. A buyer is going to want the benefit of what is to come, not what you’ve already gotten, and that’s best demonstrated by steady revenue growth over the recent past. Profitability generated by cost cutting and productivity improvements is certainly a good thing, but it only gets you so far because at some point you can’t get any more mileage out of it. The most desirable source of profits is consistent revenue growth.
  3. An ample market size. A market presence that is sustainable with a product line that will continue to be relevant in your marketplace. Having the best DVD rental service didn’t save Blockbuster and a great history didn’t save Sears. Again, your buyer wants to buy the promising future, not the glorious past, and they’d like to believe that market already knows about your company and what you do.
  4. Solid, dependable accounting. The one thing you don’t hear enough about. A financial reporting system and solid accounting are the tools you will use to prove the first two items on this list. If your accounting has holes in it because you (a) save money by employing an underpowered accounting staff, or (b) don’t believe in paying income taxes on your profits, or (c) need to hide some pain points you don’t want anyone to see, your hopes for a high end selling price will quickly evaporate during due diligence.
  5. A credible planning system. You have a budget, or a forecasting methodology that you actually use, that is fed by your accounting history and that shows you know where your money is coming from and going to, and you know how to manage it.

Now you’re ready to call that ibanker and start the process, with all the ratios, metrics and multiples they want to bring to the table. If you’re not there yet but want to be, call us. We can help.

We are Your CFO for Rent.

Tennis is a lesson in management

I really enjoy the game of tennis, and I’ve been an active player for over 50 years. Unlike the professional we see on TV, I’m a clear example that practice doesn’t always make perfect, but it does provide some clarity on what perfect might look like. I’m still working on elements of the game that I probably was told in my first few lessons. Notice I said “told” and not “learned” because it’s clear that I didn’t learn them well enough to execute on the court with consistency. And yet those few basic elements are pretty easy to identify:

  • Move into position quickly, placing yourself not too close and not too far from where the ball will arrive. Turn your body to present the best angle to attack the ball.
  • Get your racquet back in plenty of time, so the motion of racquet preparation is clearly separate from the forward motion that contacts the ball, enabling more time to hit the ball properly.
  • Keep your eye on the ball right up until you make contact. Know exactly where you want to hit the ball to get it heading in the right direction at the right arc and with the right speed.
  • Follow through after making contact, so the path of the ball is not interrupted at the last instant, sending it wildly off the court.

So, if you don’t play tennis why should you care? What’s the parallel with managing a company or a project? Well, consider this modified application of the above list:

  • Get into position to guide your area of responsibility by ensuring the right information is distributed on a timely basis to the right people. This often means taking action to ensure that the information is ARTistic, that is, Accurate, Relevant, and Timely. Yes, that applies to more than just your monthly financial reports.
  • Get ready. Prepare yourself for your role in management by reading those reports, digesting them, and forming your view on the action the company should take based on them. A good example of how not to do this is the all-too-frequent example of managers and CEOs who don’t really understand their financial reports beyond the P&L statement, but rely on others to translate and form the appropriate reactions. Cash flow statement, anyone?
  • Get clear about the action that should be taken based on your reports, including getting a consensus from your team if it’s not obvious or if their buy-in is needed. Designate the right people to take the action you’ve decided upon, and give them the authority to act with the knowledge that you believe they can do it.

Want to learn how to play? We are Your CFO for Rent.

How do you choose a professional advisor?

We are often asked by clients and business associates if this firm or that firm is a good source for advice and professional guidance regarding (whatever). The need may be for a bank, a law firm, insurance agency, search firm or any of the myriad professional services that are needed in the conduct of business. Since we have interacted with hundreds of these firms over the years, we’ve seen the good, the bad, and the ugly of professional performance. As they say, we’ve seen a thing or two.

Firms providing these services may be small, medium, or huge, and that’s often a determining factor in who we might recommend. It is a common reality that a very large service firm will typically be hard pressed to provide the level of service that a very small client needs or wants – their cost of providing that service is usually not justified by the amount of business revenue that a small client can provide. Small companies that want to have a big name bank or law firm to feel protected are usually disappointed in the quality of attention they are able to command. Usually, but not always – read on for the explanation of that waffling.

The same set of options and choices that small firms face are similarly faced by larger companies, not because they’re too small to get noticed, but because they’ve gotten into a situation that is often random based on the moment they engage with that resource – they got the wrong person assigned to them when compared to their needs.

So what’s the point of this discussion? Unless you’re hiring an army to storm the hill, you’re going to be working primarily with one person, so make sure that person is the right one for your needs. That’s it.

OK, then there’s the small question remaining: How the heck do you do that? How to make sure? Well, you can’t be sure on Day 1, but you can lower the odds that you got the wrong person. My view: you virtually inundate that person with carefully considered questions on Day 1. You listen carefully to the answers, but even more importantly you listen to the way the questions are answered. You’ll get a sense of the enthusiasm your person has about the subject of the question, whether he/she would dive into the substance of the question or instead would “have a ready resource at the firm” who would step in. Or would offer thoughts as to why that was an irrelevant question in the circumstances. And, you know, it really doesn’t matter if the question was irrelevant to the goal. It was important enough to you for you to ask. If your person doesn’t get that, listening may be a lost skill and you should consider moving on. Until you get a person who can provide the answers or at least knows how to listen with care to the questions.

We do that. We are Your CFO for Rent.

Coming out of COVID – What did we learn?

Assuming the variants don’t keep coming, the worst of the pandemic might be over. Of course, if you live in a vaccine-resistant area of the country, it may still be hovering, threatening to lower the population or at least make it very uncomfortable. Come to California. Wear your mask.

But if you’re CA-based as most readers are, and if you are a director, an owner/operator, or a senior manager in your company, it’s probably time to look at lessons learned from surviving the past year or so. Especially if, as predicted by some scientists, we’re going to see recurrences of such viruses for years to come, this is the time to look at what you’ve learned – or should have learned – that will impact the profitability and viability of your company. Here are some thought starters:

  1. Which assumptions that you had made before COVID have proven wrong? They might have been valid in normal times, but it wasn’t and might not be again. What assumptions need to change going forward? Do you feel lucky?
  2. Given the new assumptions you think are appropriate, what are the implications on company liquidity? On enterprise value? Will they require serious repositioning or or reorganizing?
  3. Have you made changes to your business model in response to your expected future scenarios? Or, do you know you should but have been putting it off because it’s uncomfortable to contemplate?
  4. In the new environment you envision, will your returns be sufficient to cover your obligations for debt service and distributions to shareholders? This assumes you’ve already made efforts to reposition corporate debt in the very favorable market structure that exists today.
  5. What is your business plan as the recovery picks up steam? Are you comfortable that it will be implemented effectively – especially if it has major changes from what went before?
  6. And finally, if this is an opportunity to get ahead of some of your competitors, how will you do that? This is not about benefitting from someone else’s pain but making sure you make all the right strategic moves to advantage your company, just as your competitor will if they get a chance.

Get your board of directors or advisory board to participate if you have one. If you don’t, that would be item 7 on my list of thought starters, or more likely item 1. It’s important to have around you people with whom you can exchange ideas, especially when some of them have experiences you don’t have but could benefit from.

We are Your CFO for Rent.

Want to sell your company to your employees?

2000 — Happy People — Image by © Royalty-Free/Corbis

When it’s time to sell the business you’ve spent years building, and you want to be sure to take care of those long-time employees who helped you make it the success it has become, a really good path to consider is an Employee Stock Ownership Plan, or ESOP, in which you sell your company to your employees. If there’s no successor in the family, having your employees become the owners of the company they helped build can be an amazing way to say thank you, and provide you a fair price for the sale of your company. Or maybe not.

That conundrum results from the use of a tool that’s been available for many years, falling in and out of favor mostly because of its complexity and the bad things that can happen – including costly litigation – if it’s not done right, for the right reasons, and in the right kind of company. And that’s why the “maybe not” needs to be considered. The Exit Planning Institute’s Los Angeles chapter presented a solid presentation on the topic this week, thanks to Tucker Ellis LLP, a law firm with a solid ESOP practice in LA and across the country. Some things to consider if you’re ready to make a move and you think this option might be right for your company:

Company characteristics for a successful ESOP transaction:

  • Strong and dependable cash flow to handle the debt service that will result,
  • At least 20 employees, the folks who will be the new ownership group,
  • A solid management team already in place, for when you’re not,
  • A strong history of good employee communication and a healthy corporate culture.

The resulting entity can make your employees very happy, and very well provided for if not outright wealthy, as long as you can make sure your plans don’t get tripped up by missing some of these key steps:

Potholes that can cause trouble if you fall into one:

  • Choosing advisors and a trustee who are skilled in this rather complex process,
  • Getting a truly fair and defendable valuation on which the sale price is based,
  • Reasonable and defendable projections of future performance to support the valuation,
  • Compliance with ERISA, overseen by the Department of Labor which will closely scrutinize your plan’s impact on employees,
  • Getting really solid advice if you want to somehow favor some employees over others, through stock appreciation rights or other ways to tip the scale toward a few especially valued members.

One thing the presenter didn’t emphasize enough, in my view, is the need for solid financial management within the company, to drive those projections, interface with the lender that will finance the transaction, and keep informed all the advisors that you’ll need to get it done right. One thing she did make clear: if you don’t get it done right, you’ll be involved with your company in a less than enjoyable way, potentially for years after you had hoped to be pursuing your personal bucket list.

We are Your CFO for Rent.

Why Real Estate? Why Now?

If you’ve not been living in a cave for the past couple years, you’ve heard about the rapid climb in home prices across the country – and much of the developed world as well. Inventory is in short supply, buyers are snapping up their first home, or their next one, or a second home, as fast as they can outbid the other interested buyers. Great for the seller, not so great for the buyer.

Conversely, in the past year or so there’s the news about office buildings going vacant as workers flee to the suburbs for remote work, office buildings are supposedly going to be half empty and begging for rent-paying tenants. Great for the renter, not so great for the landlord.

Well, which is it? Real estate going up or down? And the answer, of course, is yes. It all depends on what you want and where you are. Several of our clients have purchased buildings to house their staff, replacing rent payments with equity-building mortgage payments. When the intent is to stay in one place for a while, there are few investment decisions better than that one. These days, with interest rates the lowest they’ve been in decades – thank you, Fed – the idea is even better than usual. If you’re using a lot of space for which you’re paying rent, this could be a no-brainer. Talk to your CFO or CPA about what would work best for you.

But for the rest of us who don’t need a building to house our team, why do we care about real estate at all, except to make sure we’ve refinanced our homes at least once in the past 2 years.

So let’s tackle that question. Where do you put your money today? Some options:

  • Leave it in the bank or a money market fund and collect a whopping 0.5% per year.
  • Lend it to your bank and get a CD, collect a massive .75% per year.
  • Buy bonds from the US Treasury, ideally the 30-year ones, collect up to 1.8% per year.
  • Buy stocks, mutual funds, ETFs and the like – collect anywhere from +50% to -50%, you just don’t know when – unless you buy smart and simply wait it out.

Isn’t that exciting?

Now let’s look at the real estate market from a different angle. What if you could buy a piece of property for which there was an assured stream of income for years to come, a relatively certain gain on sale sometime down the road, that would give you annual returns of 5%, 6%, 7% and sometimes more? What if you didn’t need the building, but a very wealthy tenant could be found that very much needs the building, and that provides a product or service for which there is strong demand that will only get stronger in the years to come? Would that be of interest? Well, it turns out you can. Stay tuned for more on this in a later post.

We are Your CFO for Rent.

Payroll Tax Refund – Really?

A government program you may not have heard of – ERC, or Employee Retention Credit – is a way to get a refund of your employment taxes already paid into IRS – no strings attached. This is a refund that you’ll get directly from the IRS without resistance, if you’ve met either of the two-part criteria for qualifying. Since your bank is not involved, and the qualification is not strictly numeric (so your CPA may have already decided you don’t qualify), you may not know this program even exists, but it does, and it’s good to go through the end of this year, with 3 years after that to make a claim. How much can you get? Up to $7,000 per employee per quarter. What must you use the money for? Whatever you want. What hoops do you have to jump through to get it? Only one or two. Short list but tricky.

The trick to qualifying for the refund is to be a small business – less than 500 employees – and have your revenues impacted during 4Q2020 and/or any of the four quarters of 2021, as long as that revenue impact was 20% or more OR – and this is key – was a disruption caused by anything that resulted from some action of a government agency. That’s the tricky part, because sometimes your supply chain was impacted by a required shutdown at one of your suppliers, or one of their suppliers, or one of their suppliers’ suppliers. Think of the car makers who can’t get computer chips to finish their dashboard assemblies. Anyway, you can see that it would require some research to ferret out the qualifying criteria. Not a slam dunk, for sure. But the result can be a gift from Uncle Sam of payroll taxes that have not already have been covered by a forgiven PPP loan.

Okay, so how do you figure all that out while still running your business? Well, it turns out there are a few consulting firms – not including ours – that are prepared to do that digging and help you get your refund (or tell you that you didn’t qualify), often at NO COST to you. Their fees can be totally contingent on your getting a refund.

So, if you already have a tax advisory firm that is strong in tax credit guidance, get them on the phone. If you don’t, ask me. I know a guy…two actually.

We are Your CFO for Rent.

How to Torpedo Your Exit

So, you’ve built a successful business over the years, but you’ve added those years to your age as well. Now it’s time, you decide, to sell the business and retire to your south pacific island – or perhaps just your back-yard garden. You’ve managed your customer relationships well, revenues and profits have held up or grown, even during the pandemic. You’ve produced financial reports each month, and you’ve found an investment banker that you want to work with. You’re ready now. What could go wrong?

Well, let’s suppose your accounting over the years was a bit less than accurate in some subjective areas, like inventory valuation. You kept your book values conservative, i.e., smaller profits reported. You know there’s value there that isn’t reflected on your balance sheet, so that’s a good selling point, right? Maybe not.

One of the impacts of your “conservative” reporting was that you paid less income taxes. Without commenting on whether or not that was a goal of your reporting practices, there is a potential tax liability that is likely going to surface during any due diligence review by potential buyers. How much is that potential liability, plus penalties and interest? You don’t know, your prospective buyer doesn’t know, but they do know it’s a red flag. What else might there be? Other unrecorded assets? Unrecorded liabilities? What are they really buying? Suddenly your buyer cools off, doesn’t respond promptly to emails. And then they’re gone.

What happened? Didn’t they realize there’s hidden value here? Yes, but. It’s the “hidden” part that they are likely worried about. Hidden value offset by hidden costs? Since the best comprehensive statement of the value of your business is your financial records, and if those can’t be relied upon to a reasonable degree, how do they really get a handle on what they’re buying? Given the number of businesses that are coming to market as the current wave of baby boomer retirements builds, there are a lot of options for them to pursue that don’t involve a black box.

This is not to say you must have audited financial statements to affect a sale of the business. Most small and mid-sized businesses, even those with bank loans on their books, operate – and sell – without audits by CPAs. But that also means there is a greater need for reasonably accurate accounting that doesn’t have material misstatements over the years. And if it has in the past, one of the key tasks before you go to market the company is to develop a pattern of recent reporting that corrects those misstatements and properly reflects profits by period. That means fix the books and keep them fixed for a long enough period that you can stand behind your financial reports, knowing there is no hidden liability for taxes or other unrecorded risks. If you’re not sure how to do that, but it’s getting to be time to sell, give us a call.

We are your CFO for Rent.

Equipment Lease Accounting – Get Ready, Get Set…

If you own, operate or advise a privately owned company that leases equipment such as copiers, computers, factory machinery, vehicles, etc., the not-so-fun time is about to begin. The twice delayed start of the new accounting standards for leased assets – officially ASC 842 – is required to kick in on January 1, 2022, just 6 months away. Public companies have been dealing with this new standard since 2019, and now it’s your turn. So I decided to write a few posts over the next couple months about equipment leasing under the new reporting rules, to help get you started. Most of this material is taken from my online course on lease accounting, available at

First, as a privately owned or family owned company, why do you even care about new accounting rules that are more challenging than the old rules? Well, if your financial reports are only for the management team and the owners, maybe you don’t. But if you have any reason to get your books audited by a CPA firm, e.g. for a bank loan or exit planning, your books will be required to be in accordance with GAAP – Generally Accepted Accounting Principles – and lease accounting under the new rules is an essential part of that. Of course, if that’s not your company, feel free to stop reading.

Wrinkle #1: The new rules apply to all future asset leases, but they also apply to assets already in use in your business. Those previously leased assets will probably have to be restated as if the rules had been in place when they were first acquired. That retroactive arithmetic will likely keep someone busy for quite a few hours recalculating the historical cost pattern under ASC 842.

Wrinkle #2: When you acquire equipment under an operating lease – where your intention is to use the asset for a period of time and then return it – you have typically just paid the monthly rental, expensed it, and nothing ever appeared on your balance sheet. Not anymore. Now those assets, if leased under a term longer than 12 months, must be capitalized on the books. So long-term rentals of equipment are gone.

Wrinkle #3: Do you record that asset at the sum of your committed lease payments? Nope. How about the sum of your lease payments less some imputed interest charge? Nope. The asset gets booked at the present value of all those lease payments, plus any initial direct costs, prepaid rent, and any guaranteed residual value payments. And that amount is then amortized on a straight line over the lease term. The liability gets similarly amortized, after recognizing the interest component at an appropriate rate.

So why did this happen anyway? Simply, because the world outside your company wants to compare your cost of doing business with comparable companies that buy their assets instead of leasing them. That comparison is distorted when assets are reported differently on balance sheets and income statements.

Stay tuned for more.

We are Your CFO for Rent ®

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