Valuations: Fiction vs. Finance: What paper valuations say vs what they really mean

Automatic captions of the conversation. They can contain errors and do not name who is speaking.

Hi and welcome to the building exit podcast. I'm Julie Wilkinson and I'm your host. I started the podcast off the back of the work I do in my company Wilkinson Accounting Solutions. Um because I saw there was a big gap in well the UK and across the world really in acquisitions and exit planning especially around uh structuring of businesses and and sort of myths in terms of valuations and what owners expect to get. So I'm excited today to have Soul Cohen. Hi Soul. Hi, everyone will love it. So, uh, S's my partner in crime.

He's a senior partner at the expert eye, another accounting firm and similar to me has been involved in over 100 acquisitions through different stages of the uh, journey. So, bits of consultancies, due diligence, and post integration. So we're here today to talk about financial controls uh the real truth behind valuations um adjusted EBIT Dars and not and then also why multiples change which I think is probably the biggest bit of piece of the pie um when it comes down to sort of business structure um in our experience of over 200 deals I suppose between us.

So, first of all, S, I just want to hand over to you and say thank you for coming on the podcast and why are you wanting to come on? Yeah, thank you so much for having me on. Um, and to be honest, I think um it I as I you know this already, right? I've I've worked in such a wide range of of industries now and you know I started up at you know sort of a big accounting firm doing you know working with much larger clients and then moved into theme world and the thing that I I I I noticed in the theme world is that there aren't many people you know my background actually before I was in sort of acquisitions was in sort of risk and internal audit and the thing that um I noticed really quickly was that actually there aren't many people who get that you know who understand risk you know the concept of how you know what what are r what business risks and how do we manage them in a business um and I think that something that really stood out you know obviously I've worked with loads of accountants loads of great accountants in particular niches but something that stood out about you is that you really get that piece you really understand you know risk and controls and you know governance and and the importance of it obviously because of your background is is is in that as well um And I thought, you know, it'd be great to just come on and have a chat and and talk through Yeah.

all all about risk and and why that's really important because it is and as you say, it has a massive massive impact on valuations, doesn't it? Mhm. It certainly does. Yeah. And we're going to have some eye openers today. So if we start, so if we start at the beginning, my opinion is your valuation is sort of broken down into two. You have your valuation in terms of your EBIT D and profit. I mean, I know some people say you maybe you should use a cash flow method or whatever, but ultimately you're valuing historic um how the business has performed historically to ultimately get to a a profit of the business cuz in the end a business has a profit and loss and a balance sheet.

That's just fact. Whether it's right is another question, but it does have one. Um and that's how you people are typically valuing what is the value of the business. And then you get to this uh multiple of how much should someone pay, how many times will someone pay, which is in my opinion not really anything to do with necessarily the past performance. That's probably more the future performance and where a lot of people come unstuck in terms of what is the actual valuation because it's values are dropping because people don't have these things in place.

So um yeah, what's your view on it? Yes. Yes. So, look, my my thing on multiples has always been that um I I absolutely first of all, I absolutely agree with you. I think it's those very two distinct areas. And I love the way you frame it between sort of the um you know, that the multiple really is dealing with the future. To me, actually, that we're talking about risk, right? So, the multiple is is really dictated by the risk of the company, right? That's what I always say to to my clients. the you know the the lower you can make the risk the higher your multiple is going to be um and then we've sort of got the the EBIT DAR which is the the first bit so and I think that the point of this conversation we were going to sit and and chat and break down those two elements right so maybe we'll start with EBIT DAR and then we move over into the multiples how's that yeah sounds good so um I know that one one of the biggest well do you want to do a quick breakdown of EBIT Dar really actually I don't know if your listeners have already already know that well uh I do bang on about it all the time so so they probably do but I will say it again I probably everyone thinks I'm like a broken record um so the terminology is earnings before interest tax depreciation and amortization and the way I explain it to people is I do think EBITD is probably traditionally more used in corporate um but the reason you have it is because you have operating profit I see operating profit as that is in control of people.

It's in control of management. So gen dayto-day managers, leaders can control operating profit through their own you know accountabilities, their own strategies. EBIT are obviously then can includes things like depreciation and interest and amortization which are more accounting principles and more deemed at top level than they probably are in management because management don't decide what accounting policies are and they don't generally decide what loans people get either. Sometimes they do but not generally. So that's why you have EBIT DAR and you have operating profit.

So when and the reason people typically you're adjusting between EBIT DAR to get to your valuation is because most financial statements will incorporate some of those into the numbers. So things like depreciation don't generally get split out in company's house. If you look at the financial statements, they're in the numbers. So you have to kind of adjust back for the things that aren't um I suppose able you know they're not easily managed by you know the managers of the business. That's how I see it. Yeah, it was a really cool spin actually because you're you're talking about it being operation like the the operational spin.

Um you know what what's managed by the operational side of the business. I suppose my only my only addition to that would be that you know I always look at the stuff that's removed from EBITDAR is sort of the accounting magic if you call it that right the stuff that accountants can play around with and and change and it can be different right you might have a different depreciation policy between two companies and if we want to compare the operational performance exactly as you say right you want to look at the decisions of management between the two how can we get back to the decisions of management rather than looking at you know accounting wizardry if we call it that right so um that that that's the only way I'd split it between the two but I think that's perfect and then obviously we've got this thing you know adjusted EBIT D which is it's it's all fun and games isn't it yeah yeah and you know people are starting to go oh you can't really use adjusted EBIT D because it's more for corporates and look I do get it I do understand the terminology EBIT D just sounds formal doesn't it it sounds corporate or it's just horrific really, isn't it?

Which is why I call it operating profit because it's effectively the same thing. Um, but I think the truth is you can't really value a business without adjustments because you may have oneoffs, genuine one-offs in the business. So, the way I see it is you do have one-off trading. So, that might be things like you get grants and we tended to see that a lot around the co times, you know, where people getting COVID grants or um, you know, everyone had the payroll support and things like that. um they would have been one-off costs in those years because they would have been income given not through trade.

So you were given the money but that doesn't mean your business didn't decline behind it basically you know so therefore that money wouldn't necessarily come again. Um, so you have like the trading one-offs and then you have these artificial adjustments, which is normally down to how smaller business owners are managing their businesses, which is where the accountants come in. And this comes down to the usual things that people are talking about, um, how they pay, how they remunerate themselves as a director, and also personal costs and things like that they might be putting through the business.

Yeah. Yeah, cuz I mean I the thing is is that I actually think um it's interesting that there is this move to stop using adjusted EV data because look I think if you're if we're honest you know you you should use a multitude of metrics when you're assessing a business right and and and we all do it naturally but the thing is a just a debit dog gives us something really powerful in that it really shows us what the true operating profit of a business is. Um, and as you say, it strips out those one-off costs, strips out all the accounting wid wizardry.

And equally, you know, if a business owner has been taking out more than is needed or less than is is fairly, you needed to have, you know, someone come in and and manage that business as a CEO or managing director, then that should be reflected in in the operating profit, right? that that that that that's what we want to compare, you know, when when there's a business being sold, that's the number that we want. We don't want this, you know, inflated or deflated profit figure because the owner's just been taking out half a million pounds rather than, you know, in dividends or whatever, right?

We want to see what would it actually cost to put in a CEO um or a managing director, whatever, you know, position the owner was filling. what would it actually cost for them to be you know running that business right and what I find what I find really interesting is this talk of you know you can't trust adjusted EI dah I mean the reason I talk it take it back to my corporate days often is because I actually don't believe I believe that really owners should be running these day in month in month out when they're running the business because how does anybody price their sales and know what margins they make if they never look at their if they never look at their actual profit.

So, you know, if an owner wants to pay themselves by dividends because it's tax defective, although that's a whole another podcast whether it's actually tax effective anymore, but anyway, um if they want to pay themselves through that means because they've got the profits and it's more tax effective. There's nothing wrong with that. But this is the difference, isn't it, between what you might do for tax and what you would do for business growth. So, if you're so if you're working in the business and you've got a vital role, then you're paying yourself with dividends.

is never going to the profit and loss. But then you're using those profits to effectively mark up which is you know you know how people are often priced isn't it all my costs included to then get your sales price. How do you set your sales price if you don't incur all the costs? So I find it I find it so where there's a lot of bad press for brokers you know obviously there's a lot of brokers are over inflating prices. What I find quite what I found astonishing over the years since I've had my business is how many people just aren't even tracking it um just for yourself just for your own mindset and your own clarity of what you're actually making.

Yeah. And I think that was a big it was a big change for me actually as well when I moved into world and and and I think it was it was one of the things that actually triggered me to move was because I was like the accounting function is such a powerful engine of a well-run business right it's so like sort of integral it's almost the connector between the operations and the sales and management right you know it literally it it's the function that ties the business really together. Um, and yet when you go into theme world, people just they don't understand that and therefore they don't see the value in it and they don't invest in it in the same way that large corporates do.

Um, and I think that's a shame. And I think it's partly because everyone, you know, an accountant wants to be all things to all people and every like really good accountants have like a specific niche and they're really good in one area but, you know, not others because really accounting is a really broad profession, isn't it? Mhm. And I think and I think it comes down my what I've seen um since I've obviously worked with inme well with smaller businesses is partly knowledge because I do think unless people have worked in corporate businesses and understand hierarchy of structure they don't know the finance roles out there.

A lot of people just think when they start business you get an accountant and a bookkeeper. But you know if you were in a corporate business you'd have probably eight nine different roles in finance doing all different things for the businesses. And I counted it once there 22 positions. Yeah. For all big now really anme probably does need a mix of those skill sets but they probably they don't need them fulltime and that's the problem. It's expensive. So what I see happens is they obviously go for the accountant first and or the bookkeeper or sometimes they try and do it themselves the bookkeeping and you know at a lower scale that some that can traditionally work although actually you would argue what's the right time to bring more support in.

Um but the problem is then these businesses scale because they don't know. So all they know is their accountant saves some tax and they get a set of accounts at the end of the year. they assume that when they get these statements that they're right um because they don't they don't have tend to have good financial literacy. So they don't know how to challenge or interpret the numbers themselves. So they're trusting somebody else and then they just keep scaling sort of just think oh it's fine I love my cowen and then suddenly it becomes chaotic you know they're out of control they you know and the risk and when and not just financial risk um ne you know legal risks in terms of negligence basically you know because I remember once I saw an acquisition where it was like an antique shop or something it was that type of thing and what had happened was they had acquired this business.

Yeah. And then they go in and they find out it was something like 45% of the high value sales were all done in cash. Okay? But they had no money laundering policies, right? So now picture this. So you go into this business and 45% of these sales are being paid in cash. Okay? So now you look at what's ethical and what's legal because this is your this is your morals, is it? This is where this is literally what people are facing. So you go in so you go up to the staff and you say, "Well, we can't take cash anymore or we have to do checks on that cash because obviously if it's high value, you've got your money laundering legal requirements." So your staff go to you, oh well, if you do that, they won't come here anymore cuz they don't want to be checked.

So what do you do? You've now acquired this business where nearly half of your sales are paid by cash and your staff are telling you that these customers are going to walk if you check them. So now you've got your So what do you do? Are you negligent and you don't check them and people don't realize you know you got if you're big companies you know high risk of you know this is negligence and fraud in some in severe consequences. So do you check them or do you risk deal closing now? Have you even put that in your warranty?

you know, has anyone even thought, oh, I've got a money laundering risk here in this business, you know, and and this type of thing. And it, you know, and these are the issues that people are facing. So, people have their financial risk, but they also have their, you know, legal and sort of, you know, responsibilities to shareholders and to governing bodies effectively, which isn't just tax. Yeah. I mean, look, to be honest, I think I think that's a it's a really good it's a really good point and actually it's really fundamental, right?

Because as we said right at the beginning, you've got this the EBIT DAR and then you've got well what are the risks of the business? What's the operational risk in this business? Um and I think that's the thing that in due diligence gets missed and ignored the most. Um, you know, I've seen I've seen due diligence reports from lots of accountants and and you know, it just completely gets ignored and they go, you know, some some will go really into detail into transactional level detail of, you know, reviewing transactions.

But then when it comes to operational, you know, efficiency of the business, the operational risks in the business, it's completely like left out. And as we said right at the beginning, right, that's that's what affects the multiple. So I think yeah it'd be really good to really understand from your perspective you know what what do you see as like sort of being uh in an in a big company great governance you know they've got it's it's a whole it takes a whole department to manage you know government risk and controls right but what do you see in like anme how do you see you know good government governance and you know what canmemes do to make sure that you know they're on at least the right track well I see this a lot cuz I all the time.

So I think fundamentally I think the what I see inmemes is owners the business has grown to a scale where I call it chaotic but I think the truth is I think what happens is people end up getting to operational constraint. That's where I think it reaches its maximum point. Um now some people carry on and it becomes even worse. Um, and to be honest, if you're if we're honest, it's probably why corporate businesses fail in the end because they grow and they've got poor governance themselves. But, you know, these businesses are growing.

But, um, if you get to and what I mean by oper operational constraint, so a lot of business owners will get to a stage where the owner is online all of the time fixing mistakes cuz this is what I see. I see the biggest the biggest lower in multiple um is where it's heavily owner operated because there's a lot of risk from the buyer that there's a lot of knowledge in the in the owner. So that is one thing but I don't think it's just knowledge and I don't think it's just the fence the owner. I think it's the fact that there are corruptions in processes that in the end give cause the financial risk because the truth is every single thing that anybody does in a business ends up in a financial consequence either through time cash or profit and at the end of the day everybody's got a business to make money and that's why finance I know people have their own reasons you know they want time they want freedom but ultimately most people have businesses to make money right which is why the finance department is probably one of the critical areas because they're the ones that tell you if you make money.

But what people don't see is that all these constraints are actually there's real big risks, but the truth is the risk has never materialized to a level that anyone's ever realized. So it's accumulating slowly and secretly behind the scenes, but these risks are coming out, I think, in people's time. So, for example, the owner goes, I have to raise the sales invoice because no one updates the project management system, aka my sales don't match by 100,000 or I've undercharged by 100,000. That's what we see. We've literally just done an audit for three or four businesses, probably found 200,000 of sales under charge in the last just in the last 6 weeks.

Yeah. Then they go, I have to manage the bank account because I can't trust anybody else to make the payments, right? aka I don't have a purchasing process. So we test these. We go in, we will test 50 invoices and we normally find 55 60% are wrong anyway, even when the owner's paying them. So the owner's thinking, well, if I do it and it's wrong, I can take it on the chin, right? Because they can take it on the chin cuz it's their business. So they can take the hit cuz they've made a mistake. Somebody else makes a mistake and they kick off because they're like, why is my employees?

But now roll forward and think well now look at it from a buyer's perspective. So you're happy that you make the mistake as the owner but you get frustrated when your employees make the mistake. So now think well when a buyer buys you you're now the employee. So where you make the mistake that impacts them. Do you see what I mean? So this is what so I think two so anyway to summarize I think the biggest risks is where it's heavily owner operated. I don't think it's just the financial issue of that their payroll doesn't go through the per obviously that is one thing impacting the valuation but I think it's the hidden risks of what then don't know um because they don't see it because a lot of these things the financials do show it somewhere but nobody's done an audit or a deep dive of those numbers and let's face it so even when you're audited I mean I've worked with auditors and I remember I went into a company that was audited is within a week and I've had £150,000 that wasn't picked up in the audit.

So, you know, just because you're financially audited doesn't mean it picks up every single risk anyway. It's just a it's just a formality in terms of you have to now report certain risks to to certain stakeholders, isn't it? Yeah. I mean, actually, I remember this cuz um so it's an interesting point because I I think it's spot on. Um I I and interestingly enough actually I was at PWC at a time when it was just I joined just after sort of the or around the time of the Tesco scandal if you remember there was that big you know in Tesco's there was this massive you know missed thing on the audit and PWC were the auditors and it was actually it was in my office and I can say hand on heart it wasn't my team but uh yeah it was it was a really interesting time but in in the aftermath of Uh the response was what we need to do as part of the audit procedures is we need to do more work on management control and government governance and control right you know we need to understand what are the risks in the business you know not just financial risks the operational risks and then how are those managed in the business and if those business risks aren't managed effectively in our view then we need to do more work in those areas cuz as you Hey, I always say say to people, you know, you might find an issue in the business, it might reduce your EBIT DA, but it's also going to reduce your multiple because any any time that we find something that that that affects the profit at the end of the day will be an indication of the underlying thing, you know, the symptoms, you know, let's say it like this, right?

the symptom might be a fall in profit, but the cause, you know, the illness is a lack of control in the business. And I I think that's spot on. Um, I actually I love that you you you link it. I think you're really right on this. I'd never thought of it like this, but most control issues in the business are down to the owner. Um, I think I think that's that's absolutely true. I think if you look at most sort of theme businesses, it is down to the owner. Um, and something that I've noticed obviously working at a sort of plethora of different businesses at different sizes is really interesting that you don't get owner managed businesses really above 20 million.

It's incredibly rare and nearly next to non-existent above 100 million, right? That it just completely drops off. And I think this is why I think it's because this thing of, you know, being able to detach yourself from the business and go it, you know, owners want to do it themselves. You know, they like having, you know, I think a lot of the time they've got creative energies and they just want to bounce around from things to post and you know, you know, be they like the fact that they're wearing lots of hats. They won't say, they'll say they hate it, but I think actually they like it.

They like coming in as a savior. Yeah. Yeah, but I think where you've got the real risk is, you know, with M&A is quite prominent, especially in, you know, sort of theme world now, you know, there's a lot of people talking about it. Where I think you've got the real risk of these problems hitting over 20 million is in in buy and build because I've seen it. I've people have come to me that have built groups now of probably 50 million group. Yeah. And the problem is people are building chaos. they're not building value because what's happening is you know you buy company one and all these things we talk about are pretty much in what 95% of businesses being sold.

I know there are some that are around well but most of them have some glitches. So you buy number one, great. And it's, you know, I don't know, maybe you got a lot of money, so you put someone in it and it's running and you think it's running. Now you're the person that's got these problems. Unless you understand the financials. Now you buy number two and they've got a different system. They've got a whole different finance team and they've got and everything works differently and now but you got money. So you move money between the two because you're transferring, but that doesn't mean it runs well.

And you know I have seen people build tens 15s of these companies. I think the the what happens is at a smaller level probably under 10 million probably legal risk is relatively small. Um financial risk is high. Um I think the problem is when you start getting above 20 million what I would say is it although financial risk is there. They're more cashri. So the financial risk although it could be there might not impact the business in a short term as much unless something catastrophic happened but I think it's the negligence and the legal risk that increases which actually puts more risks on the shareholders because now you know I' I've done a lot of work especially in this type of thing and you know I've seen people go to jail for health and safety negligence for anti-bribery negligence for money laundering negligence you know um because in the end excuses you can't make excuses you know I did I didn't know cuz it's your responsibility responsibility as a director and yeah so I think the legal risks are higher the bigger you get and often because it's more visible you know the bigger you are the more stakeholders you have you have to start reporting more information you know governing bodies and all this sort of stuff so you become more visible um and so everybody sort of talks about these big companies don't pay any tax I mean that's the least of their worries I know into society is a problem but you're looking at their legal responsib possibilities.

There's loads going on behind the scenes that's problematic. Yeah, I mean I think that's absolutely right. particularly on the buy and builds and actually one of the things that we do on the on the clients when we're doing sort of consulting like sort of postexit consulting is we do this thing where we sort of we take their due diligence report and that becomes the start of their risk register right because I think that actually having and maintaining a risk register in your business is the like that to me that's the first point of you know you want to do something about you know internal management and controls will show that you actually you know think about what are the risks and you know how what are you doing to mitigate them and that's that's what we do right so we we take the the the that DD and then that becomes a risk register and then we try and we fix it I think the the other thing is that I think that in business right simple is beautiful and you're you're really good at this because you're really like systemized and you're really good at like sort of making sure that all your systems are well controlled and organized and and and stuff and you're you're a bit of a systems queen so I I don't need I'm preaching to the choir But what what I what I always say to our clients and that you know it's it's massively important to do is you know you want to standardize your backend systems as quickly as possible.

And the first one that always you should go for is the finance because once you've standardized the finance, you've got standardized reporting and once you've got reporting, you've got visibility and then and then you can you can make action, right? Once you got visibility, you're empowered to take action. And I I think um yeah, I think I think that's that's always the the sort of crucial thing. Um but yeah I mean the after finance I always think that the biggest problem is well the biggest risk in the business well you you've mentioned legal so finance legal I always think the next biggest reason risk then the reason why things go wrong is sort of people and culture so yeah I mean what do you do about that what what's your sort of thoughts on that and governance around sort of people and culture well I actually think people and culture are probably the risk the the biggest risk of everything because most of the non-compliance I mean so I call it compliance it's financial compli I call it finance it's financial and operational compliance those two things obviously you have legal compliance and things but ultimately they all come down to sort of operations and finance because that's normally where they hit um and and generally um especially inmemes it's all always coming down to people people and culture because either one nobody respects the rules so they don't follow anything or there are no rules.

So, and they just don't get told anything. So, big big ones for SMMES are normally just things like expenses. I mean, so when we do orders, when we So, we do a lot of work on P2P, you know, purchase to pay. So, we'll look at all the sort of financial and legal risks and operational risks across that whole or you know, ordering stock all the way through to payment because there's a lot of risk in that process in itself. Um and the things we find and it's just things like well employees just spend whatever they want whenever they want by whatever means they want you know so for example there'll be a PO process but they're on a job and they're firefighting they try and phone then maybe they try and phone the supplier right but the supplier just goes we don't have it in stock but they need to finish the job so what do they do um go down to wherever one of the local things and just buy it but they don't have an account then so rather than raising a PO they just go I know I'll put on company credit card or I'll put it on personal credit card and then they put it through the expenses but then there's no expenses process so nobody submits a receipt so they don't claim any VAT or they do claim VAT and they're negligent in terms of their taxes and obviously this can be in thousands and thousands of pounds so you know if you're doing this a lot which they are I see businesses all the time leaking 300500,000 of expenses all of the time and then also what you find is the non-compliance in terms of what people are spending so um commercial vehicles that they've got, you know, using them for personal use.

Um or just people I see things like people buying cinema tickets and all sorts on their on on their company credit cards, you know, um cuz there are I mean that sort of thing. It can happen in big companies too though, right? It's not just exclusive to sort of small companies that they have this problem, you know. I've I've seen it in in larger companies as well, right? Well, financial fraud is high. You know everybody will say oh no financial frauds is only for corporates. Well one of the when we help people build this in this um governance function the one thing we will do is help them set up the finance function and often that will be an internal senior finance person.

So you know cuz I'm talking bigger businesses here you know sort of over 5 million plus and generally they will need some form of financial controller finance manager whatever in house. So when we interview and we go to market, I've probably in the last six months interviewed 20 different candidates for different roles and who have come from other jobs. So you know sort of either corporates or bigger businesses and every single one has witnessed financial fraud internally within 12 months. So that just shows every every single one commented and even some of the people interviewing us you know that the businesses are helping have said oh god I'm a bit worried now because you know things are hard you got the recession and and you know people don't generally do high value frauds um so you've got two types of f fraud you've got internal fraud is someone stealing stock because everyone spend thousands on stock system and no one uses it um or you've got external internal fraud from cyber risk and um you know fraudulent bank details.

Now I started life in purchases. So I 25 years ago I used to work in corporates in purchase ledgers like bookkeeping roles and even back then we'd get 10 letters a year on headed paper where people were changing bank details and you'd phone up the uh supplier to check their change and it and it wasn't their details. I'd say we got at least 10 a year even back 20 odd years ago. So, you know, imagine what it is today with the with the risks. Yeah. Yeah. Absolutely. And it it just it just, you know, we we see it all the time.

And I remember I did a sort of succ it's it's it's a growing concern. But to be honest with you, I think that actually the internal one is the by far the more common and everyone always thinks it's sort of flipped on their head. I find that, you know, when you talk to people, they're always worried about fraud from outside. No one ever thinks about, you know, the the fraud that happens internally and sometimes it can be literally really small things. Um, you know, I I remember Yeah, I remember I remember seeing someone he put through a fraudulent sales invoice that was later written off because he wanted to make bonus.

It was literally it was it was his personal gain was like £1,500. It was a really small bonus on it. It was it was really really tiny. um because he was under pressure from his wife to go on holiday and he needed he needed the money to go on holiday and he ended up losing his losing his job because of it, right? And people don't see those things as being a potential risk. They just sort of think, oh no, that won't happen. That's fine. You know, we're we're a close-knit group. You know, there's only like 30 of us in the office or 40 of us in the office.

But actually, you know, it number one, it's it's always possible. And number two, before you know it, you know, it's it's it's actually it's bigger than you can control. And that's why it's important to have this sort of setup from the beginning, isn't it? Yeah. And also, I mean, and I suppose it's like, you know, cuz you cuz normally, you know, obviously governance and controls are to reduce the risk of error and fraud. So, you do have fraud, which is worst case scenario, but what about errors? I mean, I I do errors are more than fraud.

I mean, fraud is unfortunate, but I think it does happen a lot. I think you're right. And I think it happens in small because what is fraud? You know, nobody checks the stock. So, everyone just steals a bit of stock every now and again. Oh, that happens all the time, you know, and but no one can track it because no one uses a stock system properly. And everyone blames the system. So, I've seen people spend thousands on stock systems and and then nothing works and they go, "Oh, the system." And what they do is they go, "Oh, I need a new system." I'm like, "No, you don't need a system.

Nobody uses your system. So, you need to get people to use the system and that's the problem." But then you start looking at errors and you know sometimes people do it to cover themselves if it's got a poor culture. I mean even on my podcast on episodes you know we've had guests come on where they've found people have nearly been in 5 million of debt and no one knew because someone was hiding invoices in their drawer because they were so scared to go to the owner to tell them that obviously things had backed up and they hadn't spotted it.

So you know that that's big things. What about people ordering the wrong stock? So, they've ordered it and then they're like, "Oh my god, maybe it's 100 grand." Um, and then they think, "I've ordered it, so Oh, I know. I just won't book it in cuz it happens." Well, I've seen people ordering from China on the wrong Inco terms, so they're not insured. And I've literally seen the boat sink. I've seen a boat sink on its way and someone has got them not insured because they didn't know their Inco test. didn't know where they were insured from.

You know, you have all the different X works and DD deliver duty paid and all that and literally the boat sank and they lost about £500,000 of stock and they wasn't insured. Wow. Just And so you've got fraud and then you've got error, haven't you? And then you've got manipulation of errors and that's then driven by culture. So it all really comes back to people and culture because it's what's the culture you're driving and are you enforcing but also encouraging cuz you know I don't people say oh I can't enforce well you can enforce you know because you can have rules and you can segregate activities to stop it and you should do but also you don't want to be enforcing you don't want to be a policeman you know you want to be encouraging a sort of one you know it is all a bit fluffy but a bit of a one team and open culture and one of the reasons you want to do do that is because you do not want somebody hiding something serious from you and that is what you drive when you drive poor behavior.

Yeah. I mean I think it's one of the things of like you know when you when you have a culture where everyone follows systems and you know you have systems that make sense and and you know you everything has a system and you know the systems are in place. Well, people are just as you say there's a culture of following systems and therefore there is control because well-built systems will have built into them controls that you know protect you from from those risks and I think you know I think that's really important and the thing is is that when you have that kind of a business and you know as you say you know there's there's good systems there's good culture and whatever how much more valuable is that right how much more attractive is that to a buyer um you know when when people come to do it and do you not think people would pay more for that the multiple increases I mean we we have we see it all the time you know multiples will increase like sometimes double and and it's a big number isn't it and more literally if you were well set up you'd be you'd be I think three to five times higher in multiples because you would be really sought after especially from sort of bigger pees um yeah the right size absolely Absolutely.

It's interesting about systems cuz do they always work though? So like I just one of the things that I see and I'm not against systems. I use systems and I use AI. Okay. I think it's brilliant. But the one thing I think happens is people get over they get excited by snazzy systems. So what they do is they think the system gets rid of people and they think the system will then fix all the problems. And actually often if there's no control over the system, I actually see the system makes it worse because the amount of people I see with these fancy dashboards, uh, oh, I've got sales, I've got margin, they had these board meetings and they're all discussing their strategy on the board meetings and then you go and reconcile the back end and you got a million pounds worth of variance and you're like, how are you driving in these strategies?

Um, and and and it's all these systems with no control over the system that's doing it. No, no, I absolutely agree. Um I when I'm talking about systems, I'm talking about sort of pro I processes, right? I'm talking about people systems. Yeah. No, no, absolutely agree. You know, a tech system will will make will make will make this the situation worse. If you don't have, as you said before, right, if you don't have the right culture and the right process to follow then and and you put tech in on that, as you say, you've just given people a scapegoat to not to not follow the the the process.

Um, yeah, absolutely. I they just blame the system. Yeah, of course. Um, I've got you doing it now. Um, I mean, look, so I I think I think we've covered quite a lot, but you mentioned something earlier and I actually I'd love to get your your your take on it. You said that brokers get a bad name. And I've got my own opinion about business brokers. I think that um I Yeah, I I'll say quickly. I think there are really good business brokers, but that I think that the smaller the business sale, the less likely you are to find them.

Um, and I think that most really good business brokers or salesside consultants, you know, they are a high-end product and they normally exist at the higher end of the market. Um, but I I'm I'm really keen to think, you know, what's your experience been with business brokers? you know, as you say, they they do get a rough rep. Yeah. Well, I mean, it's an interesting one because I I do I know some really good sellside brokers or advisers, whatever they call themselves, and I I've also seen some really dodgy adjustments.

But the thing is, it's one of these things, isn't it? Is actually like in the end, you got to take accountability for yourself. So, you know, somebody can go to a broker and they can tell you your business is worth 10 times and you can believe it and even sometimes buyers believe it and they start putting in offers. But if I've seen I've seen this is this was something I saw once where so a business had made a £3,000 loss in the one year. There was only one year's accounts. Suddenly it was worth £450,000. Now, as a as the person selling, okay, if you all make a £3,000 loss and then someone's suddenly telling you it's worth £450,000.

Now, the broker might be telling you, but if the broker told you to go and jump off the cliff, you wouldn't jump off the cliff. So, just because somebody says, "My buddy, if and that happened because they were adding back £150,000 of costs, right?" But I'd be saying to myself as a person, if I really didn't need £150,000 of cost, would I be spending it? That is the question I'd be asking myself. So, you can blame the broker and the broker is wrong because the broker's probably being a bit unethical because they don't want to lose the sale.

Okay? But as the person, if you can't see that if you make a £3,000 loss and your business is suddenly worth450,000 that there's some form of issue there, then I would be saying you're not ready to sell because it is telling you straight away nothing's that good to be true. And if they're telling you, oh, you can have about 150,000. The first thing I'd be looking at is, well, why am I spending it? So, I just think it's about, you know, we can all go around and blame the brokers, but at the end of the day, we want it to improve.

I do think it starts with the owners because the only people that are ever going to change the industry are going to be the owners because the owners have to start challenging the brokers and the only way you're ever going to challenge a broker is to get more understanding and you know realism around where your business is isn't it is actually to take note of where you are and be honest with yourself. Um that's my view. I think it's a really good point. I think that yeah, it comes down to a really more fundamental problem in that most business owners are not really that they're they're owner operators rather than, you know, business investors.

And and I think that mindset shift it makes a big difference, right? Because when you're an owner operator, you're you're completely your mind is is is um susceptible to hearing these incredible astronomical valuations that you hear in the tech world or thinking that your your multiple on exit will be some kind of multiple on your revenue or you know that that people are buying you know this whole nice business and it's not just about the profit. And I think that when you're an investor, you think about your business differently and you know exactly what it is you're selling and you say right actually I'm not selling a whole business here.

I'm selling a particular asset or I am I am selling a business and therefore my business is going to be a multiple of my profit. And I think I I think that's what it is. And I think um yeah, I think it's a really interesting spin to put it on actually that you I think you're probably right that you know the sellers have to take some accountability as well and think you know does that really make sense? way you can change it, isn't it? Now, I know I mean I acquired another accounting practice. So, I've I've I've seen I've been involved in 100.

I've seen hundreds of accounts and I've spoke to hundreds of accounting firms and you know, I don't sit to bash the accounting firms, but it comes back to what you said earlier about skill set because ultimately there is a difference between someone producing a tax computation and giving someone good tax advice um to actually someone giving you strategic advice to how you can grow the business. and they are completely different things and and I don't I don't know I do think it's changing I mean that's why I do a lot of my webinars and do have this podcast and things is to give financial knowledge to people but I do think there is a lack of financial literacy just in theme world in general um and even from very astute businessmen purely because how do you know if you don't if you haven't studied it and you're getting told from an accountant and if but I just say to people if you look down your balance sheet cuz the things I've seen on the balance sheet and you don't understand the numbers.

If you go to ask your accountant and they can't explain it to you or they explain it to you, you still don't understand it, then you you're at the point where you need to move forward and not necessarily get rid of the accountant necessarily, but perhaps you need now another resource in finance to help you because they've gone as far as they can in terms of, you know, they might they still need to be there, but perhaps they're not the person that needs to be explaining this to you. And should you be waiting 18 months to get that explanation anyway?

Correct. And I think that actually there there's a wider piece here in that you know particularly when when it's directors right directors have a personal responsibility to understand those accounts right you know that the the responsibility of the accounts you know you might ask your accountant to prepare them for you but they're still your responsibility. Um, and I think that, you know, accountants have more of a responsibility to explain that to their clients and make sure that they do understand, you know, what's in the accounts and why it's there um and make it easy for their clients to ask questions.

Absolutely. I think another point is um see I I always think that when I was at PWC in in in that sort of world it was we were really normalized to working alongside other accountants right because you'd always come in as a specialist for a particular area right so you might have we'd be there as the risk team and then you might have sort of delights there as internal audit and then you might have you know KPMG as the auditors and it could really often be the case that a company is working with lots of different accounting firms and consulting firms and you're all there sort of working together and we were we were sort of normalized to that that you know you stay in your lane you give your specialism and you work out how that specialism works and sort of complements the others but and I imagine probably for you in corporate you know when you're working as part of a finance team and you're again you're working with different consultants and it's similar Uh right.

But for me for for me inme world I think it the problem stems from you get accountants they want to sort of they want to own the whole relationship and be the only person that their clients talks to maybe out of fear. I don't know what do you think about that lack of knowledge. I I mean I one of the things when I started my firm the reason that's I mean I did a bit of a survey and I spoke to accounting firms and that the one thing I realized is that I had a skill set because I think the a lot the problem with a lot of accounting firms and and at the end of the day it is what it is but you know some of maybe always well I mean I never came from a practice background so a lot will come from a practice ground and maybe steal the clients and set up on their own but you you're very pigeonhold in knowledge you know if all you've ever done is bookkeeping and tax is all you know so you know I work with a lot because I mentor and train junior finance teams and one thing I see is people and this happens and I think an accountant will only know what they know.

So if the account's only ever done the year end, it's not even sometimes that they're negligent, but maybe they don't know any better. And so and I see it in internal and external and that's because it's not even sometimes that they're bad. It's just the processes have outgrown them. You know, like as an example, let's just say you've got this process where you pay your suppliers and you send your receipts to your bookkeeper, right? So yeah, they've got responsibility to transact and put it. Now, do they do that right or wrong?

But ultimately, how do they know if they're not doing it? How do they know all these invoices you're not getting? Because they're not looking at your supplier statements. They're not looking at, you know, the creditors aren't right. You know, the system's not right. But, you know, perhaps the account, they should be saying, "Oh, you've grown. You should do this." But ultimately, is is it really their fault that they don't see that if they if the owner hasn't then put changed their setup for it to work more advanced, you know, and at the end of the day, that person's only going to know what they know, you know, they're going to know and they may not they may not see even see that side of it.

Um, and yeah, you could argue when you get to year end, but realistically, you know, accountants's not going to go, "Oh, yeah, let me go and check 500 statements, are they?" Because it's not part it's not part of the year end process. you would expect that that's happening in your bookkeeping process. Um, so I I just think it's a lack of skill and and experience. Yeah, I think I think you're probably right. I mean, I think we could do a whole other pro a whole other podcast just talking about the bookkeeping process and sort of months and whatever and you know where it is and where it should be, but uh yeah, we won't won't go down that rabbit hole today, I think.

No, I mean, I'll give you one example. So we because we see it all the time when we do this governance we help people look at the financial integrity that's basically what we do. So, you know, we'll work with people where the accounting firm had given them a month- end report, you know, and it's really snazzy. It's great. But then I remember once we just went in and checked and they'd overpaid the PAE by I think we well we always see it PA vat CIS usually they've overpaid by 20 30 40 grand and there's a variance. So they're going well they they've been doing this for years but and that's because you know I can pull I can probably pull someone with a month report together and once it's set up in a couple of hours but you there is a difference between me just running off the balance sheet from zero and me then explaining to someone integrity checking those numbers and everyone just thinks I rep my bank but what they don't know is they run on cash accounting and they just don't have any financial integrity.

Correct. and and and which is a full circle back to what you were saying before and which I absolutely agree with in that if you're not if all you're doing is wrecking your bank, you're not really assessing the possess pos the operating efficiency, the operating profit of your business. You're just looking at, you know, well, essentially, you know, from a cash accounting point of view, how are we doing? But your real profit, your real operating profit could be miles off that. And I think that's how people get in, you know, caught out with, you know, oh, we're lossmaking.

We didn't realize we were losing because they haven't accounted for all the costs. It happens in small businesses as well. I've seen it. I've seen businesses making maybe over 3 years they make 5060,000 profit a year and then suddenly someone wrecks the balance sheet and finds hundreds of thousands of credit card expenses not going through. But and literally and so but I find the mindset strange. So some this actually happened once. So we found once someone said I can't afford to pay my tax and they had this tax on a payment plan.

So this was over a cumulative number of years and anyway we came and wrecked it and it turned out there was loads of credit cards missing expenses. So basically what they had reported as this profit over those last few years they didn't actually make any profit. So they were like yeah I made profit but it's not because we all know there's a difference between cash and profit. Um anyway, so we I then said, "I really think you need to get a bookkeeper." And their feedback was, "We can't afford a bookkeeper." I'm like, "But you can afford to pay £8,000 of tax that you haven't earned." Like, I just don't understand it.

I'm like, "So, you can pay £8,000 of tax on the payment plan that you don't actually earn, but you can't afford whatever 56 700 for a bookkeeper to actually help you not get in that mess again." Um, very strange mindset sometimes, I find. Yeah, absolutely. I think I think well it comes back to that thing of, you know, you feel you feel like you'll pay for what you have to, but you don't really want to want to pay for either. Um, yeah, but I I agree. Yeah. Sometimes it's just it's pennywise and pound foolish, isn't it?

Mhm. Anyway, we could I think we'll have to do another one and we'll talk about the mother and or the cash account versus the cruel account and that'd be an interesting one, wouldn't it? I actually I'm actually doing it on my webinar. I host webinars on financial governance and I talk about um yeah, I'll tell you about it. I'm doing my next one's on the 15th of July and I'm going to start running them every eight weeks. Um cuz yeah, that's an interesting topic. But no, it's been really great. So I love, as you can tell, I love talking about this thing.

I think it's hilarious. I love talking about this type of thing. So um thanks so much for coming on. Yeah, thank you for having me on. It's been great actually. Yeah, as you say, we we could have been talking for another hour. And I just want to thank all the listeners. Um, uh, you know, if you love the show, do hit the rating and review button. It helps more people find the channel. I look forward to seeing you again soon.