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Decision Vision Episode 8: Should I Hire a Recruiter? – An Interview with Joanna Cheng, Creative Financial Staffing (CFS)

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Decision Vision
Decision Vision
Decision Vision Episode 8: Should I Hire a Recruiter? – An Interview with Joanna Cheng, Creative Financial Staffing (CFS)
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Joanna Cheng, Creative Financial Staffing (CFS), and Mike Blake, Host of “Decision Vision”

Should I Hire a Recruiter?

Should I hire a recruiter? What’s the best way to work with a recruiter? Michael Blake, Director of Brady Ware & Company and Host of the Decision Vision podcast, interviews Joanna Cheng on these questions and much more in this edition of Decision Vision.

Joanna Cheng, Managing Director and Branch Manager, Creative Financial Staffing (CFS)

Joanna Cheng, Creative Financial Staffing (CFS)

Joanna Cheng is a Managing Director and Branch Manager with Creative Financial Staffing (CFS). CFS is a leading, employee-owned accounting and financial staffing firm—the largest one founded by CPA firms. With more than two decades of experience helping companies locate, attract and hire exceptional accounting & finance professionals, CFS has unique resources to better understand hiring needs, attract higher-caliber candidates and assess candidate potential. Established in 1994, CFS today operates 30+ offices across 21 states and the Caribbean. Serving most major U.S. markets and beyond, CFS connects companies with candidates, from entry-level to executive level, temporary to direct hire and project support to interim management.

CFS has twice been named to Forbes’ list of “Best Professional Recruiting Firms” and twice cited by LinkedIn as one of the “Most Socially Engaged Staffing Agencies.”

Michael Blake, Brady Ware & Company

Mike Blake, Host of “Decision Vision”

Michael Blake is Host of the Decision Vision podcast series and a Director of Brady Ware & Company. Mike specializes in the valuation of intellectual property-driven firms, such as software firms, aerospace firms and professional services firms, most frequently in the capacity as a transaction advisor, helping clients obtain great outcomes from complex transaction opportunities. Mike is also a specialist in the appraisal of intellectual properties as stand-alone assets, such as software, trade secrets, and patents.

He has been a full-time business appraiser for 13 years with public accounting firms, boutique business appraisal firms, and an owner of his own firm. Prior to that, he spent 8 years in venture capital and investment banking, including transactions in the U.S., Israel, Russia, Ukraine, and Belarus.

Brady Ware & Company

Brady Ware & Company is a regional full-service accounting and advisory firm which helps businesses and entrepreneurs make visions a reality. Brady Ware services clients nationally from its offices in Alpharetta, GA; Columbus and Dayton, OH; and Richmond, IN. The firm is growth minded, committed to the regions in which they operate, and most importantly, they make significant investments in their people and service offerings to meet the changing financial needs of those they are privileged to serve. The firm is dedicated to providing results that make a difference for its clients.

Decision Vision Podcast Series

Decision Vision is a podcast covering topics and issues facing small business owners and connecting them with solutions from leading experts. This series is presented by Brady Ware & Company. If you are a decision maker for a small business, we’d love to hear from you. Contact us at decisionvision@bradyware.com and make sure to listen to every Thursday to the Decision Vision podcast. Past episodes of Decision Vision can be found here. Decision Vision is produced and broadcast by Business RadioX®.

 

Visit Brady Ware & Company on social media:

LinkedIn: https://www.linkedin.com/company/brady-ware/

Facebook: https://www.facebook.com/bradywareCPAs/

Twitter: https://twitter.com/BradyWare

Instagram: https://www.instagram.com/bradywarecompany/

Show Transcript:

Intro: [00:00:02] Welcome to Decision Vision, a podcast series focusing on critical business decisions brought to you by Brady Ware & Company. Brady Ware is a regional, full-service accounting and advisory firm that helps businesses and entrepreneurs make vision a reality.

Michael Blake: [00:00:21] And welcome to Decision Vision, a podcast giving you, the listener, clear vision to make great decisions. In each episode, we’ll discuss the process of decision making on a different topic. Rather than making recommendations because everyone’s circumstances are different, we talk to subject matter experts about how they would recommend thinking about that decision.

Michael Blake: [00:00:39] My name is Mike Blake, and I’m your host for today’s program. I’m a Director at Brady Ware & Company, a full-service accounting firm based in Dayton, Ohio, with offices in Dayton; Columbus, Ohio; Richmond, Indiana; and Alpharetta, Georgia, which is where we are recording today. Brady Ware is sponsoring this podcast. If you like this podcast, please subscribe on your favorite podcast aggregator, and please consider leaving a review of the podcast as well.

Michael Blake: [00:01:05] So, today, our discussion is going to be about whether to work with a recruiter when hiring new employees. And talent acquisition is a funny topic because we deal with human beings. And human beings are, for the most part, the most unpredictable things on the planet. And you don’t know necessarily what you’re going to get when you’re hiring. You don’t even know what you’re going to get when you get through the interview process. I mean, you pick a resume, you don’t even know what’s going to show up and walk through that door.

Michael Blake: [00:01:38] And in an environment now, we have some 4% unemployment and talent is not exactly growing on trees. And if you live in the Atlanta area, you can see that just by the traffic that’s in the area. You know that everybody is back to work because it, now, takes about an hour to get from [Chamblee] to Alpharetta. Talent is hard to find. But the question is you can, of course, go to the route where you can try to find talent “for free,” and we’ll find out just how free free actually is, or you can pay for help.

Michael Blake: [00:02:10] And here to help us with that conversation is my good friend, my pal, Joanna Cheng, who is Managing Partner and Branch Manager of Creative Financial Staffing in Atlanta. Prior to joining CFS, she worked for an Atlanta CPA firm in the audit practice for seven years. So, she’s a recovering CPA just like I’m a recovering investment banker and venture capitalist. She holds a bachelor’s degree from Kennesaw State University and is an avid adventure racer. I hope I’m saying that right.

Michael Blake: [00:02:40] CFS is the leading employee-owned accounting and financial staffing firm, the largest one founded by CPA firms. With more than two decades of experience helping companies locate, attract, and hire exceptional accounting and finance professionals, CFS has unique resources to better understand hiring needs, attract higher caliber candidates, and assess candidate potential.

Michael Blake: [00:02:59] Established in 1994, CFS today operates over 30 offices across 21 states and the Caribbean. Serving most major US markets and beyond, CFS connects companies with candidates from entry level to executive level, temporary to direct hire, and project support to intern management. CFS has twice been named to Forbes List of Best Professional Recruiting Firms and twice cited by LinkedIn as one of the most socially-engaged staffing agencies. And with that, my pal, Joanna Cheng. Joanna, thanks for coming in.

Joanna Cheng: [00:03:31] Thanks, Mike, for having me.

Michael Blake: [00:03:35] So, I got to ask this first. You have an office in the Caribbean. I mean, that’s just a front for like resort staff, or does one of your owners live in the Caribbean, and that’s how they sort of minimize their taxes?

Joanna Cheng: [00:03:47] We have an office in Puerto Rico, and it’s actually a pretty robust practice.

Michael Blake: [00:03:51] Okay.

Joanna Cheng: [00:03:51] Even in the light of recent events.

Michael Blake: [00:03:54] In light of the fact that island destroyed a year ago.

Joanna Cheng: [00:03:56] Yeah, there were interests, yeah.

Michael Blake: [00:03:58] So, that is a robust practice. That’s interesting.

Joanna Cheng: [00:04:02] Well, I mean, I think, as of late, they’ve had some struggles. But, again, from a temporary staffing perspective, there certainly continues to be a need for people to kind of fill the gaps.

Michael Blake: [00:04:12] Yeah, okay. That’s interesting. I would not have guessed that. So, I mean, I’ve given out, sort of, your name, rank, and serial number. You’re at CFS. You’ve been there. I think you’ve been there as long as I’ve known you. I’m not sure that I knew you when you’re an accountant, maybe for six months.

Joanna Cheng: [00:04:29] I don’t know. I left public accounting at the end of 2011. Joined CFS beginning of 2013. So-

Michael Blake: [00:04:38] Okay. So, there’s a couple of year overlap actually but-

Joanna Cheng: [00:04:40] Yeah, six years now at CFS officially.

Michael Blake: [00:04:42] But they locked me down the sixth floor of the building, so they didn’t let me out much.

Joanna Cheng: [00:04:46] Exactly. We are probably like ships in the night.

Michael Blake: [00:04:49] Yes. It’s ships in the night that were locked and never allowed to see one another.

Joanna Cheng: [00:04:53] Just like when I was an audit. It’s funny because I was gone for a year from the firm, and when I came back people, I’d run into people, and they’d say, “Oh, I haven’t seen you for a while. Have you been in out in the field?” And I’m like, “Yeah. I’ve actually not worked here for a year, but I’m back.”

Michael Blake: [00:05:07] And thanks for noticing.

Joanna Cheng: [00:05:10] It’s like I just took a hiatus.

Michael Blake: [00:05:11] A walkabout.

Joanna Cheng: [00:05:13] Right. I was just very long on it.

Michael Blake: [00:05:15] A self-audit, maybe you can call it that. So, what do you do at CFS? I mean, it sounds like you’re basically the Grand Poobah, the head honcho, the big cheese. Is that fair, at least, for the Atlanta office?

Joanna Cheng: [00:05:28] Right, queen of middle management here in Atlanta.

Michael Blake: [00:05:30] Queen of middle management.

Joanna Cheng: [00:05:31] Yeah.

Michael Blake: [00:05:31] Okay. Your highness.

Joanna Cheng: [00:05:31] I run the Atlanta office for CFS. We’re a national firm. And so, I manage a team of recruiters. And we are able to help on a temporary or direct hire basis, kind of, at any level, as long as it relates to accounting and finance within the middle market.

Michael Blake: [00:05:49] And how many people do you have on your staff right no?

Joanna Cheng: [00:05:51] We have four. We’re a team of five.

Michael Blake: [00:05:53] Okay, team of five. So, as I said, you’re a recovering CPA as I’m a recovering investment banker, et cetera, et cetera, recovering adult. What made you make that jump? When did you wake up one day and said, “Yeah, I just can’t count stuff anymore. I’ve got to go be me.”

Joanna Cheng: [00:06:11] It was really by happenstance. I think, like many people who come out of public accounting or start to look around, I didn’t really know what I wanted to do. I didn’t know what the next move was. So, I reached out to some recruiters, had some less-than-great experiences. I met one in particular that had a similar background to mine, had gone up the ranks in public accounting, gone into recruiting, was successful, opened up an office, and needed her first-time employee.

Joanna Cheng: [00:06:50] So, it was just something I decided try for a year. I mean, I think, from the things I enjoyed the most about being in professional services was the networking aspect, the relationship aspect, the adding value, and, of course, being a profit center versus a call center. So, I thought-

Michael Blake: [00:07:08] Boy, that’s huge.

Joanna Cheng: [00:07:08] Yeah. I thought recruiting could kind of be a good segue into that. And worst thing that could happen is go back and do accounting. So, some years later-

Michael Blake: [00:07:18] Which isn’t so bad.

Joanna Cheng: [00:07:19] Right. Seven years later, it seems to be working out.

Michael Blake: [00:07:23] I guess, it’s worked. Yeah. I mean, you’re still gainfully employed, productive member of society, and we haven’t had to bust you out of jail.

Joanna Cheng: [00:07:29] Yeah, not yet, yeah.

Michael Blake: [00:07:29] So, not yet. So, so far, so good. So, you mentioned you had some experience with recruiters that weren’t so awesome. I think you mentioned that.

Joanna Cheng: [00:07:40] Yeah.

Michael Blake: [00:07:40] What’s an example of that when you’ve had a bad experience yourself?

Joanna Cheng: [00:07:44] Well, it’s interesting. So, for instance, one of the — part of our process that CFS is we prefer to meet with our candidates in person, just like we like to go on site to our clients, just so we can get a really good 360 feel for the person, and the opportunity, and find that good fit. So, even before I went into recruiting, I mean, I wanted to meet people. I don’t like just virtually knowing people. I feel like I’m best face-to-face. It was just really interesting to me.

Joanna Cheng: [00:08:18] I talked to this recruiter that was referred to me, and it was a great conversation. But, by the end of it, I asked, “Oh, yes. We should meet for coffee. You should probably meet me, make sure I’ve two eyes, and off of my limbs, and yeah.” I mean, he said no, and it was just — I didn’t really know what to think about it because I felt like I couldn’t really adequately work with someone that I had never met in person, especially for such a big decision, which was a possibly career change and change of industry. Experiences like that made me think like, “There’s just got to be a better way.”

Michael Blake: [00:08:56] Yeah. I mean, it’s not like it’s a multi-level marketing scheme. It’s a serious professional position. And in what you do, every time you recommend a hire to a client, I mean, your reputation is big time on the line with that, isn’t it?

Joanna Cheng: [00:09:14] Yeah.

Michael Blake: [00:09:14] So, how you could go into that, how you could get behind somebody, and put that cloud without meeting the candidate, I’m no recruiter, but I don’t see how I could do that either.

Joanna Cheng: [00:09:24] Yeah, exactly. We’ve done hiring together in our past lives. And, yeah, I think it’s just — We don’t sell paper. And I always say that. And I don’t know if that really resonates. I think that’s a common stereotype among recruiters, and we just throw a bunch of things out there, and we just hope and pray that one of them makes us money. But I mean, there are people behind these pieces of paper. And I’ve seen the best of candidates with the worst resumes. I’ve seen pretty terrible people with really outstanding resumes. That’s part of the sniff test. That’s why we charge for our services. That’s why we have value, and yeah.

Joanna Cheng: [00:10:05] So, along with that, I also worked with a number of recruiters that provided jobs that were clearly not a match for my background. And so, again, I just kept thinking like, “This doesn’t even make sense.” This is not a, “Hey, I need a job. Here’s a job. You want this job?” I mean, it just didn’t make any sense to me. I kept thinking, “Are you even listening to me?” And, of course, I never met these people. So, I mean, I’m like, “Well, you honestly don’t know me from the next person.” So, yeah. So, I think, probably naively, going into recruiting, I thought I can make that just a better experience for people.

Michael Blake: [00:10:47] So, in your opinion, why do you think your clients hire you?

Joanna Cheng: [00:10:54] Really, I wish I knew the answer to that. If there was a concrete answer, I would package it and sell it. Prospecting would be so easy.

Michael Blake: [00:11:02] Well, how about this? How about instead of you, because I know you have a humble streak that we will try to break down and destroy over the course of this podcast. But until we get there, why do people hire you as a profession? Why do they hire somebody like you?

Joanna Cheng: [00:11:20] Well, initially, I think it’s typically out of need. But outside of that, I will say that, just like anything else, whether it’s audit, valuation, services, recruiting, people do business with people they like. I mean, that’s something that’s very important to me is to develop sincere relationships with people and to understand people’s businesses.

Joanna Cheng: [00:11:41] Hopefully, I think, my background is helpful in some sense and really understanding accounting and finance, and what that means to your company for specific positions, but yeah. I mean, it’s either that or my sparkling personality. I mean, I think.

Michael Blake: [00:11:58] I’m sure it’s a healthy combination of the two. But a thought occurred. I’m going to go off the script a little bit but not too far. It’s that, in one respect, what you and I do is very much alike is that I put together merger and acquisition transactions, and you put together talent acquisition transactions.

Michael Blake: [00:12:19] And in what I do, the reason my clients hired me, I think, is because they either have never been through a transaction, or they do it very rarely, right. And the chances are good the other person on the side of that table has done many transactions, okay. And so, they’re hiring me to kind of leverage the expertise of, say, the 200 transactions I’ve done into the one that they’ve done, right.

Michael Blake: [00:12:45] In your world, correct me if I’m wrong, but I think that, hopefully, they’re not hiring all that often for the same position. If they are, that’s a different issue if it’s a merry go round, right. But in an ideal world, you’re maybe hiring once a year, once every couple of years, or maybe once every few months if you’re growing like gangbusters, but that’s still different from somebody whose job it is to hire people 24/7 or place people to be hired 24/7, right?

Joanna Cheng: [00:13:16] Yes.

Michael Blake: [00:13:16] There’s a big advantage to having that expertise and experience in that discussion, isn’t there?

Joanna Cheng: [00:13:24] Well, absolutely. I mean, it’s what we do day in and day out. And I think that’s what the advantage is. I mean, we’re talking to people, we’re talking to companies where we have like the pulse on talent. We can see what’s available, what’s not. And, again, I think, CFS, one thing that we really emphasize is being consultative. I mean, this is, hopefully, not just a transaction. I mean, this is so important to your business. I mean, finding the right controller. And when I say right controller, I mean not someone who understands accounting can do the job. It’s someone who can help your business go from A to Z or wherever it is that you want to go that you like and that likes you.

Joanna Cheng: [00:14:02] I mean, that’s the magic, right. That’s what you can’t see from the paper. That’s what you can’t see from an online application. And I think that’s a fallacy that creates the need quite honestly. People have these experiences. We did it ourselves. We found this person. They were perfect on paper. They’re perfect in the interview. They showed up, and they were crazy.

Michael Blake: [00:14:23] Right.

Joanna Cheng: [00:14:24] Yeah? And you go, “Well, we hear that story all the time.”

Michael Blake: [00:14:26] Because they don’t say on the resume interests and crazy.

Joanna Cheng: [00:14:30] Right.

Michael Blake: [00:14:30] Right? It doesn’t show up, right? And-.

Joanna Cheng: [00:14:32] Their representative was like, “Let’s keep that.”

Michael Blake: [00:14:36] It’s on the down low.

Joanna Cheng: [00:14:36] Yeah, yeah.

Michael Blake: [00:14:36] Yeah. And, often, the people who have the most polished resumes have them polished because they’re polishing them frequently.

Joanna Cheng: [00:14:45] Right, or they’re paying for the polish.

Michael Blake: [00:14:46] They’re paying for the polish, one of the two, right? And you probably developed a spider sense. You must developed a sixth sense of some kind.

Joanna Cheng: [00:14:55] There is a little bit of that. I mean, you do get a feel for people, but that feel is — That’s, I think, the fun part. I think the best part of my job is really knowing my client, understanding their business, and then meeting somebody. I think this happened with you. Meeting someone and going, “Hey, I just met this person, and I just think you should really talk to them. I think they may be a good fit for your group.”

Michael Blake: [00:15:20] That’s true. I’d almost forgotten, I was actually a client of yours.

Joanna Cheng: [00:15:23] Yes. And we know when that works, and those types of situations more than often does, I mean, it’s a good feeling because you just feel like all the stars aligned and maybe you’re good at your job.

Michael Blake: [00:15:40] And that hire worked out. I mean, he stayed longer than I did by a lot. So, I really can’t disagree with that. So, can you point to like a favorite success story of yours where you really helped the company or even maybe helped the candidate out?

Joanna Cheng: [00:15:58] I can think of a lot of stories, but I think one thing, in fact, I had lunch today with a candidate that was a relocation candidate. It’s a really tough and usual position. It was like on the request of one of my favorite clients. And the process was painful, and it was hard because I don’t think either — we didn’t really — we didn’t know what we were looking for until we found it. But I’ve been talking to that candidate today, and how happy they are, and what they’ve been able to achieve in the time they’ve been at the company. I don’t know. It just made — that’s what makes me wake up and do what I do. And, in fact, that client is one of my adventure race buddies.

Michael Blake: [00:16:45] Really?

Joanna Cheng: [00:16:47] So, I’ve recruited for them since their inception as a startup to, now, a very successful business. And that’s something I’m very proud of.

Michael Blake: [00:16:56] So, in addition to running away from alligators and copperhead snakes and jumping over quicksand, you’re doing that.

Joanna Cheng: [00:17:02] Yeah. So, now, we throw ourselves in the briar patches and the like, yes. So, that’s real trust.

Michael Blake: [00:17:08] Yeah.

Joanna Cheng: [00:17:09] That’s when you trust, yeah.

Michael Blake: [00:17:09] Yeah, it is.

Joanna Cheng: [00:17:09] Like your service provider.

Michael Blake: [00:17:13] It is. I don’t know if anybody would trust me to lead them through an alligator or copperhead. In fact, it’s-

Joanna Cheng: [00:17:17] Oh, I didn’t say I led. I’m just, you know, but I’m there.

Michael Blake: [00:17:22] You don’t necessarily shove their head into the water-

Joanna Cheng: [00:17:25] Right.

Michael Blake: [00:17:25] … if something bad happens

Joanna Cheng: [00:17:26] Right. I would put a stick between my client and the alligator.

Michael Blake: [00:17:28] Okay.

Joanna Cheng: [00:17:30] Yeah, yeah.

Michael Blake: [00:17:31] Okay. So, let me ask you. I want to ask you this in a very smart aleck kind of way.

Joanna Cheng: [00:17:37] Okay.

Michael Blake: [00:17:37] Why haven’t you been replaced by websites? They’ve been all over. They’ve come and gone, Monster, Hot Jobs, CareerBuilder, Yahoo Jobs.

Joanna Cheng: [00:17:46] And, again, they all have their place, and they certainly have their success. And we leveraged that technology. We partner, in fact, with some of these companies.

Michael Blake: [00:17:56] Is that right?

Joanna Cheng: [00:17:56] And they’re our vendors. But, again, it just goes back to the relationship. I mean, valuation. I mean, can’t we just make a calculator, and plug in some assumptions, and-

Michael Blake: [00:18:09] There are people that are saying that.

Joanna Cheng: [00:18:10] Yeah. Come up with a number or a multiple and go, “This is the-” It’s not the point. I don’t think that’s how the world works. I mean, we’re not — people aren’t widgets. Talent, it can’t be manufactured. It’s so interesting because, I think, especially within accounting and finance, I mean, people just think, “Oh, I just need a CPA,” or “I just need an AP clerk.” And I don’t know. It’s just like anything else.

Joanna Cheng: [00:18:36] Let’s say, think about you in any job that you’ve ever had, okay. And I don’t know. Maybe people have just been very lucky, and loved everywhere that they worked, and loved the people, and those people love them. But I’ve been in several situations where I could do the job, I did it well, I just didn’t like it, or they like me, and that’s what doesn’t work, right.

Joanna Cheng: [00:18:59] I mean, middle market, in particular, is really attractive to me, (1), because that’s all I know professionally; but (2), it’s like these businesses are often someone’s baby. I mean, they’re trying to achieve a very specific goal. They’re not looking for workers. They’re looking for partners. They’re looking for people who want to be part of this team. They want people to help drive their passion to do whatever it is they want to do with this business. And that just can never be measured by a machine. And I may be eating my own words when Skynet takes over the world. But as for now, I think, my job is safe.

Michael Blake: [00:19:40] Well, I think there’s truth to that. It’s interesting you bring up the valuation part because much of my industry is being replaced by websites. And I don’t think my children would have any interest in doing what I do. But if they did, I don’t think there’s a job there necessarily for them. And we have to move towards an advisory position. And I tell people, if you want a valuation, here’s a website that you can just go get a valuation done. If that’s good enough for you, then do that, right.

Joanna Cheng: [00:20:10] I like that, make valuation.

Michael Blake: [00:20:11] If, on the other hand, you want to learn something about the business that you didn’t already know, that technology is not is not out there yet. And I think I sense that’s a very similar kind of conversation, at least, implicit conversation.

Joanna Cheng: [00:20:27] Yeah, advisory, consultative, it’s all the same thing, right. I think people aren’t looking for an answer. I mean, the answer in valuation isn’t the number. It’s, “Can I achieve my goal? What are your thoughts on that? Do you have any advice for me? What do you think?” And those are the types of questions, and that’s the type of insight, I think, I can provide to my clients. What should the salary reasonably be? Is this reasonable? Historically, this is a person’s background. Does this make sense? Is this a fit?

Joanna Cheng: [00:21:09] And we can talk through all of those things. I mean, again, it’s not a perfect science. I mean, I think that’s one thing that’s always really resonated with me just professionally is an accounting in all things. And I think, I remember you saying this many years ago, but, sometimes, we are looking into a crystal ball, and it’s just not a binary world, and there is no right or wrong. I mean, the perfect — everything could go perfect in the hiring process, and it could be the perfect candidate, but something can happen, and you have to — all recruiting is or financial reporting is just trying to control, and assess, and analyze enough of the variables to, hopefully, ensure success or some type of predictable outcome, but there’s no guarantees.

Michael Blake: [00:22:00] So, let’s talk. The large companies that have their own in-house HR departments, do they also use recruiters, or are they typically bring the whole function in-house?

Joanna Cheng: [00:22:13] Oh no, they absolutely use recruiters.

Michael Blake: [00:22:14] They do, okay.

Joanna Cheng: [00:22:14] Yeah. So, we tend to shy away from large HR departments for that reason. It’s just a lot more cooks in the kitchen than needed. We prefer to work directly with hiring manager and get a better sense of what that position is. Not saying that HR isn’t our ally, and we certainly want to work through their process, but something like a Fortune 100 company is just a completely different beast. And I think if, again, create a financial staffing just specifically, we don’t typically serve that large of a company. We probably aren’t the best resource. We’re not as willing to go and work with a VMS system where, again, in many ways, it’s selling paper. You could be drawing-

Michael Blake: [00:23:03] What is a VMS system?

Joanna Cheng: [00:23:04] Vendor management systems-

Michael Blake: [00:23:06] Okay, yeah.

Joanna Cheng: [00:23:08] … where you have to upload resumes and something, probably a robot, is looking for keywords. Again, anyone can do that. I mean, it just makes no sense to me. I could put CPA controller manufacturing expert on a piece of paper and have that picked up, but is that the right candidate for your job? I mean, maybe, maybe not. But I’ll tell you, like the effort and cost to go through all of that doesn’t really make sense for our model.

Michael Blake: [00:23:38] Now, hiring somebody today is a big commitment. And it’s not just a big commitment economically, but, to some extent, it’s a big commitment legally. And you can’t just hire completely whatever your whim takes you, right. There are certain processes, there’s certain standards of fairness that we have to observe both from a moral standpoint, a legal standpoint. Is that something that you also can help a company navigate to make sure it doesn’t accidentally step in something during the hiring process?

Joanna Cheng: [00:24:10] Absolutely.

Michael Blake: [00:24:11] And you save somebody’s bacon doing that?

Joanna Cheng: [00:24:13] Well, I mean, and I won’t use any specific examples here, but I think especially smaller businesses or owner-operated businesses. People just don’t know what they don’t know. I mean, it’s purely out of ignorance, not out of spite, but yes. I mean, there will be certain things discussed that we’re like, “Yeah, we can’t have that. That can’t be a variable.”.

Michael Blake: [00:24:35] Right. You can’t ask that question.

Joanna Cheng: [00:24:37] Right, or don’t ask that question.

Michael Blake: [00:24:39] Right.

Joanna Cheng: [00:24:42] So, yes. And from a hiring liability perspective, I mean, I think, we do our diligence as well as kind of anyone else, right. You got do your reference checks, background checks. And technology has certainly been very helpful in that that it’s more difficult now, I think, to kind of hide some of your educational or criminal skeletons than maybe you could have in the past.

Michael Blake: [00:25:05] Now, 10 years ago, we saw, remember, the job market was – to use a technical term – in the toilet. But I think firms were even using recruiters then, even in times where there’s ostensibly a much more rich labor pool from which to select talent. Why do you think that is?

Joanna Cheng: [00:25:27] Well, again, your needs are your needs. Very often, that looks and smells a certain way. So, the question to yourself is return and your effort. Your company, your people, your internal efforts, that’s going to cost you money to source and go through kind of just all the bodies, or you could outsource that function to someone that does it every day.

Joanna Cheng: [00:25:55] I mean, again, good economy, bad economy, businesses have to operate. Everyone’s always looking for talent in some respect, whether that’s from a project basis or a direct hire. And I think that each economy has different demands, and that’s why recruiting has kind of been able to navigate these different cycles.

Michael Blake: [00:26:20] So, we hear a lot or I hear a lot, and I’m sure others do, about different models where one fee model is contingency-based, the other is retained search basically. Can you explain kind of the difference between the two? And from a customer’s perspective, what do you think the pros and cons are of each?

Joanna Cheng: [00:26:39] CFS is a contingency model. So, I always like to say I work for free. I get paid upon my success, and I really enjoy that aspect of what I do. Retained search is different the sense that you pay a fee regardless of outcome, in some respects. And those are typically very specialized positions, more difficult to find positions. I mean, national and international searches.

Joanna Cheng: [00:27:08] So, pros and cons. Contingency, I mean, the pro is, again, you can get a lot of recruiters working for you for free. They’re out there kind of kicking bushes, and doing all the legwork, and hopefully bringing in the best of the best, and you can make a hire, and best recruiter wins. The con is those recruiters are working on many different other contingent searches, and you may not be their sole focus, or there could be other drivers of why you’re not seeing what you think you should be seeing from the caliber of candidate, or quantity of candidates, or whatever it is.

Joanna Cheng: [00:27:44] From a retained search perspective, I mean, that typically should be a dedicated effort. I mean, they want not only to take you money, but they do want to earn it. I’m a little bias because I’ve never worked in the retained search model. I think that the only thing I can think of is everyone has to make money, and just makes me wonder sometimes the bandwidth of recruiters even within the retained model like how much time are they truly dedicating to your search. I mean, that’s something to think about. But, again, you got to use who you know and use who you trust, right?

Michael Blake: [00:28:23] Yeah. That’s why you got us. What is a stereotype about your industry or people in your industry that we should dispel? What do most people think about what you do that’s just wrong?

Joanna Cheng: [00:28:35] I’m a big advocate of the saying that stereotypes come from somewhere.

Michael Blake: [00:28:39] Okay.

Joanna Cheng: [00:28:40] Okay. And I think one of the reasons I became a recruiter is because I had terrible experience with recruiters. And I continue to kind of hear those stories often. So, recruiting is a sales job. And I think that’s-

Michael Blake: [00:28:59] Twice over.

Joanna Cheng: [00:29:00] … the reality. That’s the reality of this job. And what I’d like to dispel is that we’re like used car salesmen, and we’re just throwing bodies at companies, and just walking away with a check.

Michael Blake: [00:29:15] Wish, it was that easy, right?

Joanna Cheng: [00:29:16] Oh yeah. I mean, that would be great because that’s the issue is that does happen. And there is a reason why recruiters can have a bad reputation. But what I would encourage people to think about is there are good recruiters, just like there are good accountants, like good doctors, good lawyers, good valuation experts. People who, hopefully, kind of care a little bit more, who take pride in what they do, and really stand behind their business.

Joanna Cheng: [00:29:47] And, also, too, I think, have the luxury to say that as a privately-held company, like we certainly are making things a little bit differently than maybe some of our larger publicly-traded competitors, and they’re driven by a different — they need a different outcome.

Michael Blake: [00:30:02] Well, they’re going to be driven — they have to be driven by a quarterly number, right?

Joanna Cheng: [00:30:07] Right.

Michael Blake: [00:30:07] They have to have 90 days of view ahead of them. And then, after that, they’ll worry about the next 90 days.

Joanna Cheng: [00:30:13] There’s just a reality of that.

Michael Blake: [00:30:15] Yeah, that’s right because that’s what shareholders are telling them they wanted them to do.

Joanna Cheng: [00:30:18] Right.

Michael Blake: [00:30:20] How does a company best work with you? Like you, I’m in the service business, but there are certain conditions in my business where the client does certain things, they make my job a lot easier, and the likelihood of a positive outcome that much greater, right?

Joanna Cheng: [00:30:36] Right.

Michael Blake: [00:30:37] For a company to maximize your effectiveness, what should they be prepared to do on your end as part of that partnership to give the best chance of securing that great outcome?

Joanna Cheng: [00:30:48] Just being available. I think that’s number one.

Michael Blake: [00:30:54] What does that mean exactly?

Joanna Cheng: [00:30:56] I think we’re in this hyper-busy world, especially when you’re a man short, or you need an extra pair of hands. You’re busier than ever. And that drives the backbone of my business. That being said, if you were truly looking for the right fit, you’ll spend the upfront time to invest in speaking with me, so I can learn about your business. You’ll make time for me to come visit, and talk to me in person, and show me around. And when we make our recommendations, really take the time to listen, and discuss, and ask questions.

Joanna Cheng: [00:31:33] I think that’s the best way to work with a recruiter. Like we’re, again, not selling paper. I mean, there are people here. There’s a reason why I’m making a recommendation. If you don’t have the time to talk to me about it, it’s very hard for me to help you. So, I’m often thinking like, “Help me help you.” I know you’re busy, but we’ve got to talk about this, and we’ve got to make time because I think this is a choice.

Michael Blake: [00:31:59] Yeah. I think I would imagine in your world, there are clients that look at you and say, “Oh, thank God, I can just hand this entire thing off to Joanna. She’ll go away for whatever period of time, and she’ll just come back with-”

Joanna Cheng: [00:32:13] A magical unicorn.

Michael Blake: [00:32:14] Magical unicorn.

Joanna Cheng: [00:32:15] Yeah.

Michael Blake: [00:32:15] Right?

Joanna Cheng: [00:32:16] Mhmm (affirmative).

Michael Blake: [00:32:18] But maybe you’ll come back with a magical unicorn, but if they don’t just sort of throw the thing over the wall, that’s more likely to happen, right?

Joanna Cheng: [00:32:25] Right. Yeah, exactly. And that’s exactly right. I think what happens a lot in recruiting, especially when you’re working, again, with many firms who will just take a general job description and kind of run with it, is, again, these are people, they’re unique. And I do, actually, use that term in my office is we hunt for unicorns. And so, something that like a purple unicorn with a gold horn is very different than the green speckled one. So, when you show up with the pink one with orange sprinkles, and you go, “That’s not what I wanted at all-”

Michael Blake: [00:33:00] It sounds like a very mythical place to work, by the way.

Joanna Cheng: [00:33:01] It’s a magical land.

Michael Blake: [00:33:03] It sounds like it.

Joanna Cheng: [00:33:05] I mean, again, it just comes down to information. And that’s what I typically advise my clients, especially when I first worked with them. I say, “Hey, we present candidates in very small rounds. We like to discuss their backgrounds with you and discuss why we think they would be a fit, and why you should consider them for hire.” And if we’re completely off target, then someone is missing information, or maybe we don’t know what we’re looking for yet. And I see that a lot as well. Sometimes, people think they need these 10 bullet points, and you go, “Well, yes, but this unicorn has six of those, and you don’t even need the other four.” But until you have that conversation and kind of work through that process, you kind of don’t know what you don’t know.

Michael Blake: [00:33:53] And then, maybe, it turns out you don’t need a unicorn, just a really nice horse will do.

Joanna Cheng: [00:33:57] Exactly, yeah, with a party hat on.

Michael Blake: [00:33:59] With the party hat on.

Joanna Cheng: [00:33:59] Yeah.

Michael Blake: [00:33:59] So, last question, and then then we got to wrap up. But I think a lot of people miss the fact that recruiting is an active job. When we call your recruiter, that’s an action-related. To recruit is as active as opposed to just sort of posting a job and waiting for resumes to fill in. And a question I’ve always had and just been kind of curious about is when you recruit somebody who wasn’t necessarily looking for a job at that time, how do you kind of gauge or kind of verify that that person’s really invested in the process, and that if they do kind of make it through your vetting process, you’re going to present them to the client that they’re going, there’s a fully invested candidate, and not just sort of as a hired gun that might be recruited away from them two years later? You know what I mean?

Joanna Cheng: [00:34:55] Well, yeah. And you see that in like the tightest labor market we’ve seen in many years.

Michael Blake: [00:35:00] Right.

Joanna Cheng: [00:35:00] And I mean, I think that in some respects, it’s the new normal, just poaching or the temptation to jump in for what it is when times are good. I think people are always open to opportunity. Again, we can’t see into the future. I don’t know if someone’s going to leave in two years or 20. All we can assess now is your factors causing them to be open to opportunities, like why are they looking? Why would they want your job? Why would they want work here? Why would they stay? I think into overriding all of that is something that is mentioned, but it’s probably not discussed as much as it should, which is retention. Whose job is it to retain these employees? Is it the recruiters’ job?

Michael Blake: [00:35:52] It doesn’t sound like because your job description is not retainer.

Joanna Cheng: [00:35:57] Right. So, that’s something I always think about. And I will say this, I mean, generally speaking, for instance, there are definitely companies that are known for extremely high turnover. And those are companies we tend to shy away from, or we will provide staffing on a project basis. But it’s hard for us to put — I always say it’s hard for us to put A people in kind of a C Company. It’s hard for us to put C people in an A company. It’s the same thing. It doesn’t work.

Joanna Cheng: [00:36:29] So, yeah. I mean, my advice in terms of choosing a recruiter also says, “Hey, yeah, there’s a cost to that. There is a benefit there. There could be some risk associated with it, but what are we doing as a company to retain that talent?” because you can get in the door, but keeping them, that goes beyond my job.

Michael Blake: [00:36:52] Sure.

Joanna Cheng: [00:36:52] And I think that’s pervasive in recruiting. I mean, people switch firms all the time. One thing that attracted me to CFS and kind of holds true in my experiences, our tenure of employees is unusually long for our industry. I do think that says something in a positive way.

Michael Blake: [00:37:14] Well, this went great. We got a lot of great information, great insights, but we can’t cover everything that we’d like to cover in a half-an-hour podcast. So, if somebody wants to ask you some questions, reach out to you, follow up, can they do that?

Joanna Cheng: [00:37:27] Yeah, absolutely.

Michael Blake: [00:37:28] So, how would they reach you?

Joanna Cheng: [00:37:30] I’m on LinkedIn. So, Joanna Cheng with, apparently, not enough of my background. I’ll let you-

Michael Blake: [00:37:41] Yes. Well, it was background-light. We’ll just say you use social media judiciously.

Joanna Cheng: [00:37:47] Right.

Michael Blake: [00:37:47] And Cheng is spelled C-H-E-N-G.

Joanna Cheng: [00:37:48] Yes.

Michael Blake: [00:37:48] Correct?

Joanna Cheng: [00:37:51] And our website is cfstaffing.com. It will have our company number. You’re welcome to give a shout, shoot us an e-mail. Happy see how we can be a resource for you.

Michael Blake: [00:38:03] Okay, very good. Well, that’s going to wrap it up for today’s program. I’d like to thank Joanna Cheng so much for joining us and sharing her expertise with us. We’ll be exploring a new topic each week, so please tune in, so that when you’re faced with your next business decision, you have clear vision when making it. If you enjoy this podcast, please consider leaving a review with your favorite podcast aggregator. It helps people find us, so that we can help them. Once again, this is Mike Blake. Our sponsor is Brady Ware & Company. And this has been the Decision Vision Podcast.

Decision Vision Episode 7: How to Hire a Forensic Accountant – An Interview with Randy Domigan, Brady Ware & Company

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Decision Vision
Decision Vision
Decision Vision Episode 7: How to Hire a Forensic Accountant - An Interview with Randy Domigan, Brady Ware & Company
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How to Hire a Forensic Accountant

Michael Blake, Director of Brady Ware & Company and Host of the Decision Vision podcast, interviews Randy Domigan, Director of Brady Ware & Company, on different types of fraud, why a normal financial audit doesn’t usually detect fraud, and signs your business might be a victim of fraud.

Randy Domigan, Brady Ware & Company

Randy Domigan

Randy is a Certified Fraud Examiner and can identify the warning signs and red flags that indicate evidence of fraud and fraud risk. He uses his expertise to help dealerships improve fraud prevention, detection, and deterrence. He has been trained to uncover and illuminate fraud when it occurs, and even more importantly to deter fraud before it starts. In addition to his fraud expertise, Randy has over 20 years of experience in tax and financial planning and internal control consulting.

 

Michael Blake, Brady Ware & Company

Mike Blake, Host of “Decision Vision”

Michael Blake is Host of the Decision Vision podcast series and a Director of Brady Ware & Company. Mike specializes in the valuation of intellectual property-driven firms, such as software firms, aerospace firms and professional services firms, most frequently in the capacity as a transaction advisor, helping clients obtain great outcomes from complex transaction opportunities. Mike is also a specialist in the appraisal of intellectual properties as stand-alone assets, such as software, trade secrets, and patents.

He has been a full-time business appraiser for 13 years with public accounting firms, boutique business appraisal firms, and an owner of his own firm. Prior to that, he spent 8 years in venture capital and investment banking, including transactions in the U.S., Israel, Russia, Ukraine, and Belarus.

Brady Ware & Company

Brady Ware & Company is a regional full-service accounting and advisory firm which helps businesses and entrepreneurs make visions a reality. Brady Ware services clients nationally from its offices in Alpharetta, GA; Columbus and Dayton, OH; and Richmond, IN. The firm is growth minded, committed to the regions in which they operate, and most importantly, they make significant investments in their people and service offerings to meet the changing financial needs of those they are privileged to serve. The firm is dedicated to providing results that make a difference for its clients.

Decision Vision Podcast Series

Decision Vision is a podcast covering topics and issues facing small business owners and connecting them with solutions from leading experts. This series is presented by Brady Ware & Company. If you are a decision maker for a small business, we’d love to hear from you. Contact us at decisionvision@bradyware.com and make sure to listen to every Thursday to the Decision Vision podcast. Past episodes of Decision Vision can be found here. Decision Vision is produced and broadcast by Business RadioX®.

 

Visit Brady Ware & Company on social media:

LinkedIn: https://www.linkedin.com/company/brady-ware/

Facebook: https://www.facebook.com/bradywareCPAs/

Twitter: https://twitter.com/BradyWare

Instagram: https://www.instagram.com/bradywarecompany/

Show Transcript:

Intro: [00:00:01] Welcome to Decision Vision Podcast, a series focusing on critical business decisions, brought to you by Brady Ware & Company. Brady Ware is a regional, full-service accounting and advisory firm that helps businesses and entrepreneurs make vision a reality.

Michael Blake: [00:00:21] And welcome to Decision Vision, a podcast giving you, the listener, clear vision to make great business decisions. In each episode, we’re discussing the process of decision making on a different topic. Rather than making recommendations because everyone’s circumstances are different, we talk to subject matter experts about how they would recommend thinking about that decision.

Michael Blake: [00:00:40] My name is Mike Blake. And I’m your host for today’s program. I’m a Director at Brady Ware & Company, a full-service accounting firm based in Dayton, Ohio, with offices in Dayton; Columbus, Ohio; Richmond, Indiana; and Alpharetta, Georgia, which is where we are recording today. Brady Ware is sponsoring this podcast. If you like this podcast, please subscribe on your favorite podcast aggregator, and please consider leaving a review of the podcast as well.

Michael Blake: [00:01:05] Today, we’re going to talk about hiring a forensic accountant. And forensic accounting is always fun to talk to because in the accounting world, they always have the greatest stories, the greatest war stories. I mean, who doesn’t love a story about white collar crime? Unless you’re in it, I guess, then, it’s not so great. But if you’re sort of a third person, it makes the best cocktail story. So, pro-tip to the listeners out there, if you’re ever, sort of, at a mixer at a CPA firm, and you don’t know who to talk to, ask who the forensic accountants are because they have the best stories by none.

Michael Blake: [00:01:43] Yeah, forensic accounting is a very specialized area of the accounting profession, and it’s one of the most difficult decisions in terms of deciding whether or not you’re going to hire a forensic accountant because by definition, when you’re considering hiring a forensic accountant, you think that, potentially, there’s been, at least, a major mishap, and in many cases, you suspect that a crime has been committed often by somebody that you trust.

Michael Blake: [00:02:18] And so, I can tell you from talking to my clients who I’ve referred to forensic accountants over the years, it’s a major hurdle to, then, make that call to say, “Yeah, I need to get this checked out. I need to have somebody really come in, and look under all the rocks, and, hopefully, find nothing. That would be a great outcome. But then, if something is going to be found that we know exactly what it is and we can make it from there.”

Michael Blake: [00:02:42] And so, to talk about that with us is Brady Ware’s resident expert. Joining us today by phone from the Gem City Dayton, Ohio is Randy Domigan, one of my business partners at Brady Ware in Dayton. Randy works in a variety of accounting, auditing, and consulting engagements, as well as corporate and individual tax areas. He provides services to closely-held businesses in a variety of industries, including manufacturing, dealerships, retail, distribution, professional services, transportation, and real estate. He leads our firm’s fraud services practice and assists with recruiting and training of new team members, and serves as the head of the firm’s Insurance Services Group Technology Committee.

Michael Blake: [00:03:26] Randy is a member of the Ohio Society of Certified Public Accountants, the American Institute of Certified Public Accountants, and the Association of Certified Fraud Examiners. He also serves as a chair for the Better Business Bureau’s Eclipse Integrity Awards Committee and is active for the Dayton Chamber of Commerce and the Miami Valley Venture Association. Randy is a 1994 graduate of Wright State University. After working three years in another regional accounting firm in Dayton, Randy joined Brady Ware in July of 1997. Randy, thanks so much for taking your time out of tax season to join us for a little bit today.

Randy Domigan: [00:04:03] Yeah. Thank you, Mike.

Michael Blake: [00:04:05] So, I’ve kind of gone through your intro but I don’t think the intro necessarily does it justice. So, talk a little bit about your role at Brady Ware, and how much forensic accounting, and maybe chasing down white-collar criminals is a part of what you do.

Randy Domigan: [00:04:24] Yeah, absolutely. So, as Mike said, I am a director with the firm. And I do work out of our Dayton office. I do head up our fraud and forensic practice. And as part of that, I do spend a good portion of my time typically outside of our tax season, which is kind of our January through April timeframe. But outside of that timeframe, I spend a lot of time working with companies to primarily strengthen their internal controls.

Randy Domigan: [00:04:53] I do get involved in cases where fraud has occurred, and I do have to go in and do investigations. What I try to do because I see the ill impacts of that on businesses and how much it can destroy a company is I really try to get out, and get in front of these things, and work with companies to help strengthen controls, reduce risk, and really find ways to to prevent fraud from happening in the first place because that’s really where you want to be. You don’t want to be on the receiving end of needing a forensic accountant, which, of course, they can do, but you want to try to be on the front end of the this and try to put preventive measures in place to keep it from happening to begin with because, unfortunately, once it happens, usually, there’s never a real good result.

Michael Blake: [00:05:40] Yeah. Once that bell gets rung, it’s very hard to unring it.

Randy Domigan: [00:05:43] Absolutely.

Michael Blake: [00:05:44] And, I got to be candid. I did not know that about the forensic accounting role. I’ve worked in other firms as well, and all they ever talk about was finding stolen money or dealing with lost profits, and damages, and so forth. But it had not occurred to me, but it makes sense now is that the other side of that is putting in internal controls and preventative measures, so that the other side of that identity that you have is, we hope, never called upon.

Randy Domigan: [00:06:14] Absolutely. And part of that is bringing awareness to what the issue is because you don’t know you need a forensic accountant until it happens to you typically. And so, trying to educate people on the front end, and show what some of the risk factors are, and bringing awareness about it is part of the battle in trying to fight fraud, so companies can implement risk management policies ahead of something happening. And I’ve even had cases where I have gone out to do some of this consulting and looking at kind of where their business risks are in, and where their controls are, and how they’re set up where I’ve actually found fraud that has already occurred, and the company was completely oblivious to it.

Michael Blake: [00:06:59] I can imagine that led to some uncomfortable conversations.

Randy Domigan: [00:07:03] Yes. it did. Absolutely.

Michael Blake: [00:07:05] So, can anybody with a CPA do forensic accounting or what is their specialized training to become a specialist as you are in that particular field?

Randy Domigan: [00:07:18] Yeah. No, that’s a great question, Mike. So, in addition to being a CPA, I’m also a CFE, which stands for Certified Fraud Examiner. So, when I originally got interested in fighting fraud and getting into that aspect of my career, I had actually been involved on an engagement where some employee embezzlement had happened, and I went in and was basically just trying to figure out what happened. It’s like where the money was stolen from and the different ways that the individual was able to steal the money. And it really just fascinated me.

Randy Domigan: [00:07:52] And so, I started looking at other ways to help sharpen my skills in that area because just with my auditing background, it really wasn’t sufficient to really cover all the aspects that go into being a forensic accountant and a certified fraud examiner. You need to understand some of the laws surrounding how fraud is prosecuted. You need to understand what some of the things that lead people to commit fraud, what some of those risk indicators are. And so, I went ahead and went to an organization called the Association of Certified Fraud Examiners, became an associate member, and started looking at a lot of the classes and things that they offered in order to become a certified fraud examiner. And as a result of that, there’s an examination I had to take and several classes. And I came out at the end of that and really started to make that part of my practice area.

Michael Blake: [00:08:56] And how long ago was that?

Randy Domigan: [00:08:59] I did that back about 10 years ago.

Michael Blake: [00:09:02] Okay. So, you’ve had a decade of experience in dealing with these kinds of issues. So-

Randy Domigan: [00:09:08] Yes.

Michael Blake: [00:09:11] Does all fraud look alike? Is there basically one flavor of fraud, and fraud is just fraud, or does it come in different forms and shapes?

Randy Domigan: [00:09:20] Really does come in different forms and different shapes. I mean, the term fraud can mean a number of different things. You can have fraud in the medical industry where you have people submitting false claims to insurance companies. And I mean, it just covers so many different things, tax fraud and refund fraud. It’s huge.

Randy Domigan: [00:09:47] The area that I tend to focus on a little bit more tends to deal with occupational fraud, which is one of the most common occurrences of fraud. Occupational fraud, basically, deals with employees, directors, just individuals within a company that commit fraud. And it can be fraud from any direction. Typically, it relates to like something around a cash disbursement or something like that. It could be related to payroll. There’s just a number of different things where fraud can be committed against an organization, but it’s typically asset misappropriation, and that can take a number of different forms.

Randy Domigan: [00:10:36] So, what are a couple of different forms? What are, kind of, the flavors of asset misappropriation? And, I guess, to the simple mind like mine, asset appropriation means stealing stuff, right?

Randy Domigan: [00:10:51] Correct. So, one thing would be cash disbursements fraud. So, if somebody were to write a check to themselves or to a fictitious organization that they controlled that was an unauthorized disbursement, that would be an example of a cash disbursement fraud. Another way, another example that would be if somebody paid themselves through payroll, either an extra paycheck, they modified their pay rate, where they could be paid more money than what they were entitled to or what had been authorized and approved, again, that’s an asset misappropriation because they’re taking funds that have not been authorized to be taken.

Randy Domigan: [00:11:39] Another way could be inventory theft. They just, actually, just go in and take something right off the shelf at a store or within the organization. There could be equipment. Anything like that would relate to an asset misappropriation. And that’s, again, probably, the most common type of fraud that I tend to get involved with.

Michael Blake: [00:12:00] I was talking to somebody who does inventory tracking for hospitals not long ago, and they’ve got a company that facilitates that. And, apparently, one of the biggest — I don’t know if you’re doing medical work or not, but if one of the things that I learned is that for a given hospital, hundreds of thousands of dollars of stuff just walks out of the hospital. It’s not like bottles of aspirin either or stethoscopes. It’s like significant equipment that just sort of goes missing. Have you experienced that or heard of cases like that?

Randy Domigan: [00:12:35] Yeah. It does tend to happen in large medical facilities. I don’t typically get involved with those as much. Most of them have been focused around companies where they’ve had an employee just internally, well, a lot of times, involved with the accounting area where they’ve got access to those funds in some way, shape, or form. It could be that they are one of the authorized check signers. It could be that they are or they have access to online banking, and they wire money out of the account. And so, a lot of it is stuff that they can turn quickly into something that they can use. I don’t see as much inventory theft, but it does happen because there is a market for those things. And most of those things can be easily sold and turned into cash.

Michael Blake: [00:13:29] So, if these people that that that commit fraud, I think, the psychology here is interesting. I’ve had some experience with it just observing forensic accountants, kind of, across the hall and in valuation of other places. What’s the profile of the person who commits fraud? Are they somebody that’s they’ve already been out of jail three and four times, already kind of a known risk, or is it more somebody that that maybe the first crime they’d ever committed, at least, on record?

Randy Domigan: [00:14:00] Well, it can be both. That’s why if companies are hiring individuals into a position of trust, it’s really important to go through a very formalized and very detailed background check to make sure that somebody that you’ve got coming in hasn’t already served jail time, hasn’t been arrested, or anything else for one of these other crimes. So, to answer your question, on the other end, yes, it can happen to just about anybody unfortunately.

Randy Domigan: [00:14:35] Different circumstances come up in people’s lives that can give them the motivation that they would need to commit fraud. There’s what’s called a fraud triangle that has the different aspects of fraud that lead somebody into committing fraud. And the first thing is motivation. And there’s a number of things that can lead to motivating somebody to commit fraud.

Randy Domigan: [00:15:01] It could be that they’re living beyond their means, and they need additional money to help support what they’re spending. Might have had a medical incident, or a loved one that was hurt in a car accident, or they developed some disease where the medical bills just keep coming, and they have to find a way to cover those bills.

Randy Domigan: [00:15:20] It could be just bad credit. They might have had a bankruptcy. They might have been divorced that just really threw their finances into turmoil. There’s also things like alcohol and drug abuse or gambling. Just things like that where people have this additional need for funds that they’re not able to get just from what they’re earning in their paychecks every week. So, those types of things can motivate people to commit fraud initially.

Randy Domigan: [00:15:50] The second step is you know for them to justify it. People will justify it in their head by feeling that they are worth more than maybe what they’re getting paid. They see maybe somebody else in the company that’s making more money, and there’s maybe some jealousy there. They say, “Hey, wait a second. This person is making this much. I contribute more than what they do. I should be making more money.” So, that’s how they kind of justify it in their head.

Randy Domigan: [00:16:17] And the other thing is the opportunity. The opportunity presents itself. It could be that there’s a weakness in the control system that allows them to do it without it being detected. And that’s usually a big thing. And most people know their jobs very, very well, so they know what what’s looked at, and they know if they try something whether or not they would get caught or not. And so, it might start out as, “Hey, I just took a little bit here or there, and nobody said anything. Nothing ever comes up about it.” And so, it starts going further, and it gets bigger, and bigger, and bigger, and it can just snowball into something very, very large.

Michael Blake: [00:16:56] So, all right. So, now, I’m listening to this podcast. As a listener now, I’m afraid someone is stealing money, somebody is taking money out of the till, writing fake invoices, walking our laptops, whatever it is. As a business owner, how can I keep my eye out for warning signs that fraud might be going on? Are there any kind of telltale symptoms that you can share?

Randy Domigan: [00:17:24] Yeah, absolutely. So, one of the things business owners definitely need to be in tune with is what their employees have access to and looking for changes in their employees’ behavior, lifestyle, things like that. So, if I’m a business owner, and I know that I am paying my accounts payable person just, say, $50,000 a year, and they drive up in a $100,000 Mercedes car, that might be a red light that goes on to say, “You know what, something doesn’t look right there.”.

Randy Domigan: [00:18:05] And there could be a very good reason for that. However, it’s those kinds of things that you just need to be aware of and aware of changes to your employees. If you see a behavior change or you see physical symptoms of something that don’t look right, that should be something that you would look at and maybe say, “You know what, I should probably look a little bit more into that.”

Randy Domigan: [00:18:29] Another sign would be if you are having unexpected cash flow issues that just don’t make sense. I mean, your sales are up from what they were last year, and you would think your profitability is up, but you can’t meet payroll for some reason. You’re like, “Wait a second. Why don’t we have enough money in the bank to make payroll?” or “Why can’t we pay our vendors on time?” And it just doesn’t make sense to you, or you see just unexpected financial trends in your financial statements that don’t make a lot of sense. That’s when you know there could be a sign there that something’s going on, and you need to look into it and investigate it.

Randy Domigan: [00:19:08] When you when you described that, it sounds to me like financial fraud looks an awful a lot like data breaches in that the data breach is rarely, if ever, a one-time occurrence, and the one you hear about or by the time you hear about it, it’s really not one incident, but it’s likely something that has gone on, sort of, in a low-key, hard-to-detect way over an extended period of time. Does fraud often act like that as well? You wind up being the boiling frog, and you don’t realize it until you’re not a live frog anymore>

Randy Domigan: [00:19:49] Absolutely. And the sad part is, a lot of times, when fraud occurs, it’s people who the owners trust in it and, a lot of times, have been with the company for a long time. And, again, it starts out small. It’s, “Hey, I did a little bit here and a little bit there, and nobody noticed. Nobody said anything. And I figured out, hey, I can exploit this a little bit more. And I find different ways to do it.” And it starts getting bigger, and bigger, and bigger by the time you get to it.

Randy Domigan: [00:20:21] And, sometimes, it goes, “I had one case that had gone on for 20 years and I had no clue what was going on. And on an annual basis, if you look at it, it’s like, okay, well, it wasn’t enough to really damage the company in any way.” But in the aggregate, if you look at, say, at 100,000 over 20 years, that’s a lot of money that the company has lost to fraud. And it was all because it was this person that was in a trusted position of authority within the organization that exploited our weakness that was there.

Michael Blake: [00:20:54] Yeah. Yes, you’re right. And then, you think on top of that, if that $100,000 had been reinvested in the company or reinvested elsewhere, there’s a multiplier effect too of lost returns.

Randy Domigan: [00:21:08] Absolutely.

Michael Blake: [00:21:09] So, in your experience, is fraud more likely to come from the top part of the organization, say, at the CFO controller level, or in middle management, or kind of down in the shop floor cash register level, rank and files, more places where it’s more likely to occur, or does it kind of occur all over the place?

Randy Domigan: [00:21:31] It can really happen anywhere. The larger frauds tend to happen at the higher levels of the organization. So, if you have like, say, a chief financial officer that has access in the ability to cover up a fraud for an extended period of time, those can get very, very large, unfortunately. If you have somebody on the shop floor that’s stealing from you, and they’re stealing scrap metal, or parts, or something, and they’re selling them in the black market, yeah. I mean, you’re probably not going to notice any major financial impacts from that, but it’s still going to be impactful because you’re missing inventory, you’re not getting the money back from that scrap, and things like that. So, yeah, but it can happen all over.

Michael Blake: [00:22:18] Now, a lot of companies, of course, are subject to formal financial statement audits according to GAP. Is it reasonable to expect that over the course of the audit that fraud will just be detected over the due course of a well-performed financial audit?

Randy Domigan: [00:22:39] Yeah. Unfortunately, it’s not likely that a normal financial statement audit is going to detect most types of fraud. Audits are just not designed to detect fraud. I mean, there are aspects of the audit that will get an understanding of how the controls and things are set up. And if they see a glaring weakness in the control system, they should be designing their audit procedures around that to detect something.

Randy Domigan: [00:23:06] However, some of these things are so well hidden, and they’re not large enough to really be caught in the financial audit. Most of them aren’t. I mean, you have a very small percentage of them that would potentially get caught by a financial statement audit, but a forensic accounting engagement or audit really will dive deep into the specific areas where there is risk after an analysis is done. And so, yeah, just unfortunately doesn’t. And a lot of people think that because, “Hey, I have an audit done. I should be really good, and I don’t have to worry about fraud occurring.” That’s just not the case.

Michael Blake: [00:23:45] Yeah, I think that’s right. And my recollection is if you carefully read a standard financial audit engagement letter, there’s typically language that says, “We’re not necessarily going to detect fraud. That’s a separate exercise. If we stumble upon it, great. But don’t rely upon this exclusively to find that kind of issue.”

Randy Domigan: [00:24:06] That is correct.

Michael Blake: [00:24:09] So, okay. So, let’s say now that I’m a business owner, I commission a fraud engagement, and I find something. What typically happens then? Do you call the cops, and they just sort of cuff the person, they walk him out of the store, or what happens then?

Randy Domigan: [00:24:31] Yeah. I mean, I think, it’s going to vary depending on what type of fraud it is. I mean, obviously, if it’s something very egregious, and somebody is continuing to do it, and if you don’t get them removed immediately, further damage is going to occur to the company, then, yeah, you’re going to want to take some immediate steps to get that person out of their ability to do that.

Randy Domigan: [00:24:54] However, most cases, if you hired somebody to come in and kind of do a fraud checkup – that’s kind of what I’ll call it – and they happen to discover a fraud, first thing you should really do is get an attorney involved that has got experience in dealing with this kind of matters. And you need to look specifically for an attorney that has experience dealing with fraud situations because there are various federal and state laws that cover fraud.

Randy Domigan: [00:25:25] Now, again, if it’s somebody that you found stealing money out of the till, obviously, you get them out of there immediately because you don’t want to continue to incur losses as a result of them taking that, or stealing inventory out of the back room, or something like that. But this is really more for having somebody that’s in a position of trust that might be stealing through the payroll system, or the cash disbursements, and things like that that I described a little bit ago.

Randy Domigan: [00:25:55] You really want to have somebody get involved that knows the different areas that they can be attacked to try to recover the funds because, obviously, the end result is you want to try to recover as much as you possibly can. Unfortunately, with most fraud, the people spent the money already. And so, you have to have other ways to try to collect, and attorneys know how to go about doing that. And so, you definitely want to get them involved on the front end.

Michael Blake: [00:26:21] Yeah, I’ve noticed that. That’s very unfortunate about the people that commit fraud, they’re not very good savers and investors.

Randy Domigan: [00:26:29] No, they aren’t, unfortunately.

Michael Blake: [00:26:30] They never invested into a wise portfolio, diversify stock and bonds, and have real estate, and stuff. They’ve bought a Tesla, or they paid for a cruise to Easter Island, or they bought like a solid gold trailer, or something like that. It’s rarely something you can just say, “Well, I’ll just write you a check, and pay you back, and off you go.”

Randy Domigan: [00:26:53] Yeah, first class plane tickets for a trip to Europe. I mean, those are the kind of things that typically the money is spent on.

Michael Blake: [00:27:00] Yeah, you kind of mentioned the psychology. So, I would imagine that attorney that you call, or maybe it’s more than one attorney because I got to imagine there’s employment issue too, if you accuse somebody of fraud, and then you’re going to fire somebody for cause, you better be right, or you’re in a world that will hurt yourself, right?

Randy Domigan: [00:27:21] Yeah, absolutely. That’s why you really want to try to get those attorneys involved quickly to mitigate risk to the company in any potential additional losses.

Michael Blake: [00:27:30] Now. what if I suspect fraud, I bring you in, and you come back, and you say, “You know what, all this stuff is explainable. I mean, yeah, you ought to improve some processes and some transparency, but doesn’t look like anybody stole anything.” Is there a risk of fallout within the organization after you’ve done that, if you kind of hit the nuclear button, and then you’ve got other organizational problems to solve, or can you do that in a way that’s discreetly, so you can kind of get in and out, and very few people know you’re even ever doing that or suspecting anybody of fraud?

Randy Domigan: [00:28:11] Yeah. No, Mike, that’s a great question, and it’s something that we run into a lot, especially when the owner wants to just kind of have a checkup done. Come in, and kick the tires, and see how the controls are set up. And if you find something, let’s talk about it. That’s how a lot of the engagements go.

Randy Domigan: [00:28:28] So, if you’ve got somebody that’s good at working with employees, and the narrative comes out as to why somebody is there, and somebody is asking questions, and looking at some different things, you can definitely get around some of those concerns of having the organization just have major shakeup because somebody’s been here investigating a fraud or something like that. So, there are definite ways that you can go about that to mitigate that with employees and personnel within your organization. You just have to make sure that you have the right person that kind of talk through what your narrative is around it.

Randy Domigan: [00:29:11] So, a lot of times, it can be, “Hey, we’re looking to redo our insurance policy, and they want us to look at some of our controls, and policies, and things like that.” It could be that, “Hey, this is done in conjunction with our year-end audit, and they’re doing some other steps to look at some different things.” I mean, there’s a number of ways you can go about it to help mitigate any of that fallout.

Michael Blake: [00:29:36] Now, are there certain kinds of businesses that are more vulnerable or less vulnerable to fraud than others?

Randy Domigan: [00:29:48] Mike, just about every business could be susceptible to fraud. Now, if you do everything in your company, and you write all your checks, you take care of all the accounting, you ship all your merchandise out, you have nobody else involved in it, and you’re kind of a one-man shop, you probably don’t have to worry about too much fraud occurring within your organization. But as soon as you bring on somebody else, even if you’re a pretty small company, you have susceptibility.

Randy Domigan: [00:30:15] And, unfortunately, for smaller companies, they tend to have larger frauds occur because they do have maybe one person doing a lot of the different jobs that, typically, in larger organizations, they can move around to different people to help increase the controls around a lot of those key areas to try to mitigate fraud risk. But even with a small company, there are some very, very practical things that business owners can do to help mitigate the risk. And there’s a couple more things that might have to be added to their plate or even other employees’ plates, but it’s very easy to do without adding additional cost or headcount into even small organizations to help really mitigate fraud risk.

Michael Blake: [00:31:05] Well, that’s a great entrée then because I’m sure our listeners would like to understand, is there a short, kind of, punch list of things that owners can do fairly easily to reduce their exposure to fraud?

Randy Domigan: [00:31:23] Yeah, I would say that there’s definitely some things that they can do. I mean, where you see fraud that has gone rampant, it’s typically because there is very little oversight by the owner on any of the financial records. And it does happen a lot in small businesses. You have a business owner that is out trying to do sales, is out trying to make sure that if it’s a manufacturing that all the products are getting where it needs to go, the methods of distribution that they’re managing, shipping, and all those other different things. And the last thing that they want to have to worry about is, “Okay, who’s paying the bill? Then, did we get all the money collected from our customers?” and things like that.

Randy Domigan: [00:32:04] But when there’s no oversight there at all, that’s where the risk exponentially increases. And so, yes, there are definite things that business owners can do that would help mitigate that risk. And, again, it’s not a lot of additional time that they would have to spend in it, but some very simple things that you could go through. And, really, it just depends on each business. So, it can’t just be some blanket saying that, “Okay. Well, yeah, if everybody does this, that’s going to reduce your risk for fraud.” Yeah, there probably are a couple general things that you could do, but each company is just going to be real different because they’re going to have different levels of employees, different levels of knowledge, different facets within their business where they’ve got risk for fraud to occur. So, really needs to kind of be specific to each company when you look at it.

Michael Blake: [00:33:02] Right. Because the nature of the fraud that can occur is going to be different from a burger restaurant to, say, an auto dealership.

Randy Domigan: [00:33:09] Absolutely.

Michael Blake: [00:33:12] Okay. So, we’ve covered a lot of ground today. We probably could cover a lot more, but time is finite. So, if somebody wants to contact you for more information, can they do so? And if so, how can they find you?

Randy Domigan: [00:33:27] Absolutely. The best way to contact me is probably through e-mail. My email addresses is rdomigan@bradyware.com. And it’s R-D-O-M-I-G-A-N @ Bradyware.com. You can also contact me at my Dayton office. The number is 1-800-893-4283, or you can visit our website at www.bradyware.com, and you can go through the services link, you can find fraud there, and there’ll be a link directly to me on that website as well.

Michael Blake: [00:34:09] All right, very good. Well, that’s going to wrap it up for today’s program. I’d like to thank Randy Domigan of Brady Ware so much for joining us and sharing his expertise. We’ll be exploring a new topic each week, so please to tune in, so that when you’re faced with your next business decision, you have clear vision when making it. If you enjoyed this podcast, please consider leaving a review at your favorite podcast aggregator. It helps people find us, so that we can help them. Once again, this is Mike Blake. Our sponsor is Brady Ware & Company. And this has been the Decision Vision Podcast.

CTWJ E7: Jamie interviews Mark Beres and William Kouba

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Tucson Business Radio
Tucson Business Radio
CTWJ E7: Jamie interviews Mark Beres and William Kouba
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 Guests

Mark Beres

Mark W. Beres, Co-founder, President & CEO, Flying Leap Vineyards, Inc.  
Address 342 Elgin Rd., Elgin, AZ 85611
Phone number (520) 954-2935
https://www.flyingleapvineyards.com
Social Media:  @flyingleapwines

Mark is the President & Chief Executive Officer of Flying Leap and is the company’s co-founder.  A native of Washington State, Mark grew up in Walla Walla, one of Washington’s most exclusive winegrowing regions – his formative years spent steeped in agriculture and ranching.

He has several years of successful large-scale commercial viticulture experience, including all aspects of vineyard development, operations, and harvesting. These include land preparation, efficient vineyard design, surveying, heavy equipment uses, project scheduling, and commercial planting. Mark has extensive experience in managing grapevines throughout their life cycle, from nursery to setting of fruit to all aspects of annual vine canopy management and harvest.

A highly successful entrepreneur, Mark leads Flying Leap’s core teams – agriculture, production, sales & marketing, and investor relations. Among his chief responsibilities are establishing & executing the company’s business strategies, organizing its infrastructure and promoting Flying Leap’s brands.

I am married to my wife, Michelle – a native Tucsonan, and we reside in Vail, Arizona (a suburb of Tucson). We raise Siberian huskies – Comrade, Indigo, Yukon, and Balto, plus we have a parrot named Sparky. I moved to Tucson in 2006 following retirement from the US Air Force and have made southern Arizona my home.

However, I grew up in a winegrowing region in southeastern Washington state in a small town called Walla Walla. It was there that I worked in ag pursuits as a kid, my childhood steeped in viticulture and ranching. Flying Leap began as a farming operation in southeastern Arizona (Willcox), with our primary goal being to sell fruit to the state’s wine industry.

Our winemaking endeavors began in 2011 when we produced a vintage from fruit we purchased in California and made under a custom crush agreement with Callaghan Vineyards in Elgin. The wines sold quickly, and we expanded production in 2012 with nearly double the process weight. In 2013, we harvested our first crop from our Arizona vineyards, and we’ve been producing estate wines ever since.   

William Kouba –

Owner of William J Kouba Insurance Agency. 
Phone: (520)-204-6702. Address - wkouba69@gmail.com

I have done many things in my lifetime, from Jet Aircraft Mechanic in the US Air Force, Epidemiologist with CDC, High School Teacher to Director of Marketing at W C Thomas General Contractors and even RV Sales.

However, after retirement, I was searching for something that would allow me to determine when and where I wanted to work, make a little bit of money and help others.  The Medicare and Health industry for the past 5 years has supplied that for me.  I have made my home here in Southern Tucson and in my spare time, I like to travel with my wife Jillian.

About Your Host

JaimeOverturfheadshotJaime Overturf
Farmers Agent, Entrepreneur
2555 N Campbell Ave
Tucson, AZ 85719
(520) 293-2900
joverturf@farmersagent.com

As a local Farmers® agent in Tucson, AZ, Jaime Overturf helps customers identify the insurance coverage that best fits their needs. This process is straightforward and personalized to help make them more informed about their insurance options.

Jaime has the knowledge and experience to help customers better understand their coverage options–whether that Jaime has the knowledge and experience to help customers better understand their coverage options–whether that’s auto, home, life, business insurance and more. You can connect with Jaime on Facebook.

Decision Vision Episode 6: Should We Hire a CFO? – An Interview with Jay Ruhm, JCR Financial

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Decision Vision
Decision Vision
Decision Vision Episode 6: Should We Hire a CFO? - An Interview with Jay Ruhm, JCR Financial
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Jay Ruhm and Michael Blake

Should We Hire a CFO?

Michael Blake, Director of Brady Ware & Company and Host of the Decision Vision podcast, interviews Jay Ruhm on when to hire a CFO, what a good CFO offers a growing company, and whether there’s a role for the fractional CFO.

Jay Ruhm, JCR Financial

Jay Ruhm

Jay Ruhm recently retired from Dinova, where he was CFO for the past 8 years and is currently offering financial consulting services to startups, early stage, and venture companies through his newly launched firm, JCR Financial Consulting.

As CFO of Dinova, he worked closely with the Founder and CEO as they took a bootstrap startup through several funding rounds of both debt and equity, culminating in a $40 million equity investment by Frontier Capital in 2017.  Finding the startup and venture world the most exciting environment of his career, Jay is looking to share the benefits of this experience with today’s aspiring entrepreneurs.

Jay received his MBA from Columbia Business School in NY.  He spent the formative years of his career at American Express where he rose from Financial Analyst to Southern Region Financial Officer of the Corporate Services Division.  As Financial Officer, he also had financial oversight responsibilities for several other Amex businesses based in Atlanta.  Jay led several major strategic initiatives including a major pricing initiative that saved Amex $125 million of at-risk annual revenues.

Between his stints at Dinova and Amex, Jay spent time as a Senior Managing Consultant at Huron Consulting, leading varied teams of up to 40 people working on the Delphi bankruptcy from the initial filing to post-emergence.  At the time it was the largest manufacturing bankruptcy in US history.  He also initiated and led the development of a system to coordinate the claims across multiple parts of the case.  He also spent time as a Division CFO at Kelly Services improving back office systems and pricing methods.

Michael Blake, Brady Ware & Company

Mike Blake, Host of “Decision Vision”

Michael Blake is Host of the Decision Vision podcast series and a Director of Brady Ware & Company. Mike specializes in the valuation of intellectual property-driven firms, such as software firms, aerospace firms and professional services firms, most frequently in the capacity as a transaction advisor, helping clients obtain great outcomes from complex transaction opportunities. Mike is also a specialist in the appraisal of intellectual properties as stand-alone assets, such as software, trade secrets, and patents.

He has been a full-time business appraiser for 13 years with public accounting firms, boutique business appraisal firms, and an owner of his own firm. Prior to that, he spent 8 years in venture capital and investment banking, including transactions in the U.S., Israel, Russia, Ukraine, and Belarus.

Brady Ware & Company

Brady Ware & Company is a regional full-service accounting and advisory firm which helps businesses and entrepreneurs make visions a reality. Brady Ware services clients nationally from its offices in Alpharetta, GA; Columbus and Dayton, OH; and Richmond, IN. The firm is growth minded, committed to the regions in which they operate, and most importantly, they make significant investments in their people and service offerings to meet the changing financial needs of those they are privileged to serve. The firm is dedicated to providing results that make a difference for its clients.

Decision Vision Podcast Series

Decision Vision is a podcast covering topics and issues facing small business owners and connecting them with solutions from leading experts. This series is presented by Brady Ware & Company. If you are a decision maker for a small business, we’d love to hear from you. Contact us at decisionvision@bradyware.com and make sure to listen to every Thursday to the Decision Vision podcast. Past episodes of Decision Vision can be found here. Decision Vision is produced and broadcast by Business RadioX®.

 

Visit Brady Ware & Company on social media:

LinkedIn: https://www.linkedin.com/company/brady-ware/

Facebook: https://www.facebook.com/bradywareCPAs/

Twitter: https://twitter.com/BradyWare

Instagram: https://www.instagram.com/bradywarecompany/

Show Transcript:

Intro: [00:00:01] Welcome to Decision Vision, a podcast series focusing on critical business decisions brought to you by Brady Ware & Company. Brady Ware is a regional, full-service accounting and advisory firm that helps businesses and entrepreneurs make visions a reality.

Michael Blake: [00:00:21] And welcome back to Decision Vision, a podcast giving you, the listener, clear vision to make great decisions. In each episode, we’ll discuss the process of decision making on a different topic. Rather than making recommendations because everyone’s circumstances are different, we’ll talk about and we’ll to subject matter experts about how they would recommend thinking about that decision.

Michael Blake: [00:00:41] My name is Mike Blake, and I’m your host for today’s program. I’m a Director at Brady Ware & Company, a full-service accounting firm based in Dayton, Ohio, with offices in Dayton; Columbus, Ohio; Richmond, Indiana; and Alpharetta, Georgia, which is where we are recording today. Brady Ware is sponsoring this podcast. And if you like this podcast, please subscribe on your favorite podcast aggregator and please consider leaving a review of the podcast as well.

Michael Blake: [00:01:05] So, today we’re going to talk about whether to hire a chief financial officer and when to hire a chief financial officer. And this is a decision, I think, that any company that plans to grow to any size must wrestle with. You can’t manage a business without numbers. It’s just impossible to do that. And then, managing by the numbers goes a lot beyond simply debits and credits, counting beans, counting money as it comes in. In fact, on another podcast, we’re talking about data analytics, and that is becoming part of the CFO’s job description.

Michael Blake: [00:01:49] But the big question, particularly for small companies, when you take that plunge, because CFO, these Chief Financial Officers, if they’re any good, they ain’t cheap. And that represent — and they’re not generating revenue – at least, not directly – they’re not selling, they’re not marketing, they’re not advertising, but you can’t find a big or even medium-sized successful company that does not have a competent CFO at the helm.

Michael Blake: [00:02:18] And, as a listener, you’re probably wondering — you might be wondering, “Should I hire a CFO now? Is it something I should wait two to three years on, or did I hire a CFO too quickly? Did I take that plunge too quickly, and maybe I should have waited?” And we’re going to talk about that. We’re going to talk about this issue with one of the best in the business. I am delighted to have my good friend, Jay Ruhm, on the program with us today.

Michael Blake: [00:02:49] Jay and I have known each other for a long time, longer than any of us would probably care to admit. We know where each other’s bodies are buried. We’ll just sort of leave it at that. But Jay recently retired from a company here in Alpharetta, Johns Creek, called Dinova, where he was the Chief Financial Officer for the past eight years, really from startup until exit. And he’s currently offering financial consulting services to startups, early stage, and venture companies to his newly launched firm JCR Financial Consulting.

Michael Blake: [00:03:25] As CFO of Dinova, he worked closely with the founder and CEO as they took a bootstrapped startup through several funding rounds of both debt and equity, culminating in a $40 million equity investment by Frontier Capital, which is a North Carolina-based private equity firm in 2017.

Michael Blake: [00:03:41] Finding a startup and venture were the most exciting environment of his career, Jay is looking to share the benefits of this experience with today’s aspiring entrepreneurs. That’s why he’s here. Jay received his MBA from Columbia Business School in New York. I didn’t realize that. You’re smarter than I thought. That’s great. He spent the formative years of his career at American Express where he rose from financial analyst to Southern Region Financial Officer of the Corporate Services Division. As financial officer, he also had financial oversight responsibilities with several other AMEX businesses based in Atlanta. Jay led several major strategic initiatives including a major pricing initiative that saved AMEX $125 million of at-risk annual revenues.

Michael Blake: [00:04:23] And. there’s sort of the canned introduction. I’m going to go off the script a little bit. Jay brings a wonderful and very unusual combination of technical acumen and just plain horse sense that you don’t often find. And maybe I’ll let him tell you about the Dinova story. I like it so much. I want to tell it, but that’s depriving him of the opportunity. But this is a guy who’s paid his dues. There are a lot of CFOs around, but this is a guy who really paid his dues to get from where he started off with Dinova to now enjoying, at least, a semi retirement. If I build him up any more, he’ll never be able to live up to the hype like the Batman movie. So, Jay Ruhm, welcome to the podcast, my friend. It’s great to have you on.

Jay Ruhm: [00:05:14] Thank you, Mike. Thanks for having me. It’s a delight to be here.

Michael Blake: [00:05:17] So, I’m going to start. I’d like you to talk about the Dinova story because, I think, it talks about the evolving role of the CFO. That company literally went from napkin to something big, something that had an eight-figure exit, and you were there pretty much every step of the way. So, talk about the Dinova story and your role. And I’m already jumping off the script, but we’ve known each other long enough. I can do that from day one, minute one. Talk about that story. It’s so awesome. The world’s got hear it.

Jay Ruhm: [00:05:53] I was on a consulting gig for a number of years in the bucket of no good deed goes unpunished. This was supposed to be a short bankruptcy, 90 days, solve one of the first day motion issues, and I ended up staying for four and a half years helping the Delphi company through its bankruptcy from the day they filed until well after the emergence. So, as I roll off that gig, my second phone call — The first phone call was home of course. The second phone call was to a very, very good friend of mine named Vic Macchio. Vic had this idea for Dinova. And so, I called him and said, “Hey, I’m off. How are you doing?” And he says, “I’ve got Dinova up and running.” I said, “That’s terrific.”

Jay Ruhm: [00:06:46] So, I get home, I go visit him, “What are you doing?” He says, “Well, I’m trying to raise some money. This thing is going to be bigger than I am.” And I said, “That’s a delight. I’m happy to help you. Do you have financial statements?” He says, “No. I don’t need financial statements. This is a pretty simple business model.” I said, “Vic, you need financial statements.” He comes around and says, “Okay. Let’s get some financial statements.” And he says, “But I can’t pay you.” And I said, “Vic, not a worry. I’ve known you 25 years,” at that time. That was 10 years ago. And I said, “It will all work out in the end. I believe in the business. Let me help.”.

Jay Ruhm: [00:07:27] And so, we started looking to raise some funds. That’s where I met my good friend, Mike Blake. Mike, you had no small role in that with your introductions to people in the community. You were a great, great help in helping us secure that funding and helping us network through the community.

Michael Blake: [00:07:46] I think I was the ugliest cheerleader on the planet, but okay. If you want to give me the credit, I’ll stop resisting it. I’m awesome. Go ahead.

Jay Ruhm: [00:07:53] There you go. So, we raised a few million dollars and got the business up and running. And over the years, took in some small amounts of equity, but I would call that A round the primary round. And their incomes, what does a CFO do? The first thing I did was work with Vic and manage the financials, so that we were cash flow-positive. As quickly as we could be cash flow-positive, that’s key. An investor does not want to hear, “I need money from an entrepreneur. I need money to make payroll.” An investor wants to hear, “I have an opportunity, which I’d like to take advantage of. Are you in?”

Michael Blake: [00:08:39] When an investor hears that, “I need money to make payroll,” it’s like we’re talking about the movie Airplane. By the way, does anybody know how to fly a plane? It goes over about that well, right?

Jay Ruhm: [00:08:53] So, right away, early on, you could use, at least, some CFO to help guide the financialship as it were. And through the years, we maintained financial discipline, turned profitable in the middle of the period, somewhere around 2014-2015, and grew the business that way. I think one of the key things that a CFO does that’s helpful to a business in that stage is other than the CEO, the CFO is the only other one that doesn’t have a parochial view or a view from a department head. It’s the one place in the company, other than the CEO, where an individual has a cross-company view. And that’s a pretty vital role, and it’s important that the CFO understand that and apply that. So, when one department head says, “I want to do this,” where’s the one place who’s going to say, “Well, you need to talk to this department and that department because you’re going to have impact over there”?

Michael Blake: [00:10:03] That’s interesting. I’d never heard of the CFO’s role being described that way. So, in effect, you become the air traffic controller?

Jay Ruhm: [00:10:10] In effect, yes. And it’s at a peer level too because the department heads and the CFO, they all report to the CEO. And so, that’s key. And so, you’ve got to be a good partner and a good team player.

Michael Blake: [00:10:26] So, let me ask this then. So, you’re brought into Dinova, Dinova, I think, at that time, was not generating revenue, or if it was, it was de minimus revenue. Is that correct?

Jay Ruhm: [00:10:37] It was de minimus, right. As I said, Vic had said, “Yes, I got Dinova up and running.” He didn’t tell me it was $12. Just getting started at 12 bucks, but it was small.

Michael Blake: [00:10:47] But it’s higher than zero, right?

Jay Ruhm: [00:10:49] Yes, it was more than zero.

Michael Blake: [00:10:50] So, technically, it was revenue-positive. So, why do you think he saw wisdom in hiring a person whose job is to count money when there is no money to count yet?

Jay Ruhm: [00:11:03] I’m not sure that that’s why he brought me in. I don’t know that Vic was thinking, “I need financial help.” It was more that-

Michael Blake: [00:11:12] Yeah, clearly.

Jay Ruhm: [00:11:14] It was much more that we had been good friends for a long time, and I offered to help for free. And when you’re starting a business, and you’re a CEO, and you’re trying to get something going, you take all the free help you can get.

Michael Blake: [00:11:28] So, one of the things I’m taking away from this is that a CFO, and at least in your case, you tell me if you think it’s more common or not, but you are kind of internal trusted advisor, right? We talk about trusted advisors and the outside. Ostensibly, I am a trusted advisor to god knows who. But you became Vic’s internal trusted advisor that was captive, somebody he could talk to, and early on, would have skin in the game by the way of having a modest ownership of the company and so forth.

Jay Ruhm: [00:12:03] Sure.

Michael Blake: [00:12:03] Right?

Jay Ruhm: [00:12:04] Yes.

Michael Blake: [00:12:06] And that has maybe very little to do with finance.

Jay Ruhm: [00:12:11] It has. You’re correct. It doesn’t require the knowledge or the technical skills that a CFO typically has, but that role is vitally important. And many experienced CEOs know that when they’re hiring a CFO, they are hiring a trusted adviser.

Michael Blake: [00:12:33] And is that why you wanted to have a CFO role? I mean, the CFO role is not easy, and it’s high stress. There’s very high turnover in the CFO world. It’s like a baseball manager almost hired to be fired. That’s the nature of the game. Why do you want to do that? What was your calling to do that?

Jay Ruhm: [00:12:55] I was lucky. Early in my career, I started off as an engineer and didn’t succeed very well. And so, went to – as we used to say in the ’70s – find myself. And I found myself curled up in a ball over in a corner, and picked myself up, and started looking at all different kinds of things, and found the business classes to be easy and fun. And the more I got into it, the more I enjoyed the operating finance role as opposed to accounting. What I like about operating finance is it’s there on the front line of the business.

Jay Ruhm: [00:13:33] As you said before, no, I’m not the one ringing the cash register, but I am the one working with the sales leader to price, and what’s a good deal, and to coach and advise not only the CEO but all of the other department heads as to what makes good financial sense.

Michael Blake: [00:13:57] All right. So, now, I think one of the reasons to bring in a CFO is to get the CEO out of the CFO business, right?

Jay Ruhm: [00:14:07] Yes.

Michael Blake: [00:14:09] To let them do what what they do well. So, if you’re at liberty to do so – We’re going off script again, that’s okay – Talk a little bit about your relationship with Vic. And we know what his strengths are. What did him hiring you enable him to do more of that made Dinova successful?

Jay Ruhm: [00:14:27] In a bootstrapped startup, you have to do everything. And Vic was paying the bills, literally, writing the checks, and keeping track of everything. And so, I took him out of that business. I started paying the bills, keeping the books. That was the very, very beginning, preparing the financial statements, as well as advising on business direction and strategic issues.

Michael Blake: [00:15:00] And then, that enabled him to do more of what?

Jay Ruhm: [00:15:03] At that stage in the business and pretty much throughout, his forte is is marketing, sales and marketing. And so, it really allowed him to work that much closer with the sales and marketing folks and build the business on that side. As Vic and I often joke, I say, “Vic, you take care of the revenue. That’s not my thing. You bring in the revenue. I’ll take care of the expenses and the bottom line and make sure we have a healthy balance sheet.”

Michael Blake: [00:15:34] And as I recall, he is very good at raising capital too, which if you’re to generate revenue, you’d better be raising capital. You’ll have one of those two things in the short trip, right. So, I think, the wisdom of him bringing you in as that internal trust advisor enabled him to get out the things that were not value added from his perspective and really focus on the things that were required for Dinova to ultimately thrive, right?

Jay Ruhm: [00:16:01] Yes.

Michael Blake: [00:16:02] Right.

Jay Ruhm: [00:16:02] Yes, absolutely. One of the things that you mentioned raising capital as a value-add, to a point. When you spend too much time raising capital, you’re not focusing on the business. And one of the things I wanted to do was get Vic out of the capital racing business and raise funds when we had to, when we needed to. And when I say when we had to, it wasn’t to make payroll. Remember debt, from a CFO’s perspective, is a tool if you can lever up the balance sheet from nothing. The example I use is the cost of capital. If your equity costs 30%, then you’re not going to take on a 25% return project. That’s not worth it. But if you can throw a little debt on there at 5% or 10%, you bring that cost of capital down to 20%, then, all of a sudden, you’re 25% projects start to look pretty good, and it lets you do more.

Michael Blake: [00:17:08] And, now, working cost of capital. Now, we’re talking dirty. That’s good. Yeah, the finance geeks are going to really geek out on this. So, I think, a lot of listeners don’t necessarily understand the difference between a CFO and a controller. And many companies, I think, hire a controller and they may decide that that’s enough. But I wonder how many people really understand the difference between a CFO and a controller. Can you explain that difference because they are different roles? The controller typically reports to a CFO if there is one. What are those jobs? How do those job descriptions typically differ?

Jay Ruhm: [00:17:50] Well, it starts right with the skills that are brought to the table. There’s a reason one can major in Finance in school, and one can major in Accounting in school, and they are different. So, it starts right with the skill set. Accounting is very technical, very important. The financial statements are how a business communicates to its audience, its investors. And it’s very, very important that the language of accounting be observed, so that those financial statements mean something. That is the primary focus of a controller is not only the preparation, the debits and credits, also the controls – hence, the word controller – but there are checks and balances that one needs to put in place, segregation of duties. We’re really going to get into it now, Mike.

Jay Ruhm: [00:18:45] When we started, we had our first audit, and I told the auditor, “Yes, I pay the bill. I pay the bills, I reconcile the bank account, and I prepare the financial statements. How’s that for segregation of duty?” Man, there wasn’t any, but that’s what it was. So, the controller is going to build all those processes as the company grows and prepare the company for its first audit, which, by the way, I recommend be done as early as possible. You always want to build the infrastructure ahead of the future growth. You don’t want to find you’ve got all this money coming in, and you can’t control it. That’s a recipe for losing some. And so, that’s the primary focus of the controller.

Jay Ruhm: [00:19:35] The CFO is a broader job. The CFO must be fluent in accounting and all that goes along with it. But the CFO, as we’ve talked earlier in the show, also has to be the internal advisor. Another piece of the CFO job that we didn’t talk about is strategic. And that is, what’s the strategic plan? There’s another function that many folks know is BP&FA, business planning and financial analysis. That falls under the CFO as well. And, oftentimes, in a growing company, the CFO is wearing many, many other hats. I had responsibility for HR. And so, there’s lots of things.

Jay Ruhm: [00:20:25] I had a mentor once, when I was at American Express, a young lad was working for an executive. And he said, “Hey, I’ve got an HR person. I have a marketing person. I have an operations person. And if it’s not HR, marketing, or operations, it’s finance.” And so, the finance is the one place that’s got to pick up all the loose ends. Make sure all the Ts are crossed, and the Is are dotted.

Michael Blake: [00:20:52] Interesting. Okay. So, I’ve never heard the role quite that described and quite that way, but it does make sense of the C-level positions other than CEO as you talked about. It’s the least siloed of any of those functions, right? And I’m reading a lot about the CFO role even changing beyond that as the stereotypical CFO role is you’re the numbers guy. And you leave the strategy to somebody else or the job is to somehow make the finance work with that strategy or advise when the finances will not support that strategy and it must be altered. But I’m seeing a trend where those two roles are now converging. You cannot be a non-strategic CFO and be successful anymore in that role. Do you agree with that?

Jay Ruhm: [00:21:50] I completely agree with that. One of the benefits of being at American Express early in my career is that’s a very, very forward-thinking company. It’s been a leader. What I define as a great company is a company that’s been a leader in its field, top of its game for a hundred years, not 15 or 20, because all of those companies that are leaders in their field and have been for a century are in a completely different business than they were a hundred years ago. How did they do that? Microsoft may very well be a great company, and it is a great company, but their business model hasn’t yet been turned completely upside down. They’re growing, they’re bigger, but they’re not in a completely different business than they were when they started. I think Procter & Gamble has one product that’s a hundred years old, and that’s Ivory Soap.

Michael Blake: [00:22:49] Is that right? I didn’t know that.

Jay Ruhm: [00:22:51] Yeah. Ivory Soap has been around a very, very, very long time.

Michael Blake: [00:22:54] Okay.

Jay Ruhm: [00:22:54] So, right there at the operating level within AMEX, there was a distinction between accounting and a business unit CFO as I was. Now, of course, if something went wrong on an audit report, it landed on my desk. But, generally, I was not involved in the debits and credits. It was BP&FA, and it was an advisory role to the general manager. And that was back in the late ’80s. And the world has since moved much, much more in that direction. And I don’t mean to take anything away from my CPA brethren. They bring a whole lot to the table, and I’ve seen many, many CPAs who are just as strategic as any other CFO, and they make great CFOs.

Michael Blake: [00:23:51] So, I was going to kind of ask this. Historically, there’s been this dichotomy or this distinction that you either had a CFO who is a real accounting wiz, or you had a CFO that really understood finance, could have conversations with bankers, venture capitalists, and so forth, set up financing schemes, and you really couldn’t have both in the same individual. So, you had one of the other, and you chose that role depending on how the organization shakes out, and what their particular goals and needs are. Is that distinction meaningful anymore?

Jay Ruhm: [00:24:36] Yes, it still is.

Michael Blake: [00:24:38] Okay.

Jay Ruhm: [00:24:38] Because as we were talking earlier, when I described the differences in the roles between what a controller does and what a CFO does, they’re still extremely vital to the company. And even a CPA and CFO. And I know many of those, they will also have a controller work for them, so that they’re not totally focused on that, and they free up some time to do the advisory role and the strategic role that’s required of a CFO today.

Michael Blake: [00:25:14] Okay. So, do you have a story out there where you, as a CFO at Dinova, what’s an example where you felt like you made the greatest impact on the company?

Jay Ruhm: [00:25:28] That all comes back in my view, ultimately, to a leadership question. And it’s much more about leadership than it is about necessarily technical finance. So, as we were growing, it had been my approach to prepare the infrastructure for the growth, so that when we had outside funding coming in and needed to deliver audited financial statements that we had the processes and procedures in place, and how would I get that done.

Jay Ruhm: [00:26:05] And in leading a team it wasn’t me. I was fortunate enough to have a dedicated team of professionals, great, great people who I keep in touch with, of course, who I would set the guiding way, and said, “Okay, we need to-” A great example is the implementation of NetSuite. We were on QuickBooks Online. Just didn’t meet our needs. A great product, we used it for many years, but we needed something much, much more. And I wanted online, which, at the time, QuickBooks didn’t have. QuickBooks would have meant a server. I didn’t want that.

Jay Ruhm: [00:26:42] So, we went with NetSuite, and it gave us a lot more flexibility in terms of analytics. It gave us great, great efficiencies, and that had a huge impact because it allowed us to grow and build the finance team and structure and get all those things done.

Jay Ruhm: [00:27:07] Well, I always had my eye on, what’s a world class finance organization? What is it as a percentage of the expenses or the headcount? And my research indicated it was something less than 10%. I wanted less than 10% of the resources of the company going to the finance and the infrastructure. And so, that was the target. And to do that, like I said, it comes back to the team and the leadership. And in leading a team, you set a direction, you leave your door open, and then you get the hell out of the way and let them go to work.

Michael Blake: [00:27:50] So, all right. So, I think this is drawing out a very important point because, I think, many folks, especially if they have not hired a CFO before, we equate CFO with accounting first; finance second, ironically, but there are intertwined. But what’s coming out of this is that it’s not about how much money you have to count. It’s not about how complex your finances are, but do you need somebody else, or you always need somebody else on the team who is a good leader who happens to have a skill set in those particular areas. And no firm can ever have too much leadership, right?

Jay Ruhm: [00:28:36] Right. There’s an old saying, and you mentioned it earlier, you said a CFO can be expensive. I would suggest that it’s less expensive than not having one.

Michael Blake: [00:28:50] Because things get missed, right?

Jay Ruhm: [00:28:53] Yes.

Michael Blake: [00:28:53] And people don’t get led. And when you’re in a startup position particularly, right, you can outspend your mistakes.

Jay Ruhm: [00:29:04] That’s true. And I’m going to relate it back to the advisory role. Every small company tries to get a good board of advisors, but they’re external people. And the CFO can be the internal advisor, as you pointed out earlier. And how that differs from the external is not only a better understanding of the nuts and bolts of the business, but it’s also a frequency. How often does the CEO get to turn to somebody and ask a question? You make use of the outside advisors, but on a daily basis, it’s the CFO.

Michael Blake: [00:29:44] Yeah. It’s a lonely place, right? So, the CFO makes it a little bit less lonely. I’m curious about your position on this. Of course, in your position with Dinova, where Vic didn’t have the money to pay you right off the bat, you accepted equity as part of that compensation. But even if a company has cash, do you think that ownership of the company in some fashion ought to be a requirement of the CFO, or do you think it matters?

Jay Ruhm: [00:30:16] It matters a whole lot. And my own view is that ownership of the company should be spread as far and wide inside the company as possible. Absolutely critical. What goes along with that, just giving somebody ownership of the company doesn’t mean that they’re always going to act in the best interest of the company. And I’m not suggesting malfeasance. What I am suggesting is a simple lack of knowledge. When you give a financial device or implement such as a share of stock to an HR manager who is not very terrifically skilled in HR matters, but not in finance-

Michael Blake: [00:31:01] They’re not Warren Buffett necessarily.

Jay Ruhm: [00:31:04] So, what goes along with that is some level of financial knowledge has to be spread along. So, in my view, just a recap, I think as many people as possible should have stock. And when that stock goes out, there should also be workshops and sharing of knowledge of what is finance. And as a valuation expert, Mike, you understand the name of the game for small companies. To get to that exit, you have to understand valuation. What makes the stock price go up?

Michael Blake: [00:31:37] Yeah. Yeah, for sure.

Jay Ruhm: [00:31:38] And it’s more than just making money.

Michael Blake: [00:31:40] So, one of the roles we often associate with a CFO is to be a counterweight to the CEO. That’s stereotypical. Do you find that to be true? And if so, how do you manage that, so the conversations are always constructive and not potentially destructive?

Jay Ruhm: [00:32:14] I would say that’s even desirable, Mike. You want a yin and yang. There’s no better role for a CFO than to have the classic entrepreneur as the CEO. That CEO is going to do a lot of things that the CFO just can’t. They’re not in the toolkit, right? And that’s where the advisor and the relationship comes in. There has to be healthy discussions. Not every entrepreneur can bring in a CFO that they knew for 25 years. You’re going to have to hire somebody who you previously didn’t know. However, you’ve got to start building that relationship immediately, and there has to be that healthy give and take.

Michael Blake: [00:33:06] And one thing, often, in observing how you manage that, I don’t recall a story of you ever telling Vic no but rather responding to a decision and saying, “Here’s what the impact is.” And we’ve said that we’ve had certain goals. In your case, it was on a certain amount of cash in the account, right, certain amount of safety. And if we do it this way, it’s going to take some of that safety away.

Jay Ruhm: [00:33:37] I would say yes to both. I don’t often retell stories of when I’ve told Vic no, and I’ll let him tell you how many times he’s heard me say no, but it’s always followed up with, “Here’s why.” I would not trade away the classic entrepreneurialism that Vic brought to the table-

Michael Blake: [00:33:57] Sure.

Jay Ruhm: [00:33:58] … for anything.

Michael Blake: [00:33:59] It was critical.

Jay Ruhm: [00:34:00] It was absolutely critical to the growth of the business. So, that’s where our healthy discussions came in is, “You want to do what?”

Michael Blake: [00:34:11] But you didn’t always agree necessarily right off have to achieve a consensus somehow.

Jay Ruhm: [00:34:16] I would say most of the time, we came to consensus. And there were times where he would take my advice and not do something. And there were other times where he would say, “Nope, we’re doing this, and I’m pulling rank on you.”

Michael Blake: [00:34:38] And that happens.

Jay Ruhm: [00:34:39] That absolutely happened. And you know what, didn’t hurt my feelings at all.

Michael Blake: [00:34:42] That’s the NFL, right?

Jay Ruhm: [00:34:43] Yup.

Michael Blake: [00:34:46] So, one last question I want this could be a two podcast. But do you think about part CFOs? There are a lot of those services around, fractional CFO services. Is there a useful role for providers, advisors like that to you’re not quite sure about if  want a CFO full maybe you don’t feel comfortable financial commitment, or do you think you’ve just got to  the Band-Aid off and just go?

Jay Ruhm: [00:35:19] No. I think, there’s a role for the fractional CFO. There absolutely is. What I would advise in a relationship with a fractional CFO is that you don’t have that CFO doing the accounting.

Michael Blake: [00:35:36] Really?

Michael Blake: [00:35:37] Why?

Jay Ruhm: [00:35:40] Because I would want that CFO going over business plans, making forecasts, understanding the business, and advising. I would have an outside CPA or a bookkeeper. What many, many businesses do when they start up is get that accounting piece done. I would keep that away from the fractional CFO, just so that I’m not spending my resources having the CFO doing that.

Michael Blake: [00:36:12] And in effect, spending $250 hour and a $60 an hour skill set, among other things. Right?

Jay Ruhm: [00:36:18] Yes. That’s a good way to describe it.

Michael Blake: [00:36:20] And I think I’ve seen this too is that, sometimes, a CFO will be hired, but then they’re doing the wrong not doing CFO things. And that’s not great either.

Jay Ruhm: [00:36:36] Yeah. There is a balance that has to be struck between where the CFO spends their time. As you recognized right up front, we’re not the ones who make the cash register ring, but I sure want to help make it ring. And if I’m preparing a financial statement, which I did in the beginning because I had to, when I’m doing that, I’m not out meeting a customer.

Michael Blake: [00:37:06] Right, okay. This has been great. We have all kinds of other things we could cover, but we can’t cover this topic exhaustively. If somebody wants to follow up with you and ask about some of this, can they do that?

Jay Ruhm: [00:37:27] Absolutely.

Michael Blake: [00:37:27] So, how would they get a hold of you?

Jay Ruhm: [00:37:30] Best way to do it is through e-mail. I’m at Gmail. It’s my name followed by the number one. So, it’s jayruhm1@gmail.com.

Michael Blake: [00:37:42] All right. Very good. Well, that’s going to wrap it up for today’s program. I would like to thank my good friend, Jay Rhum, so much for joining us and sharing his expertise with us on this CFO issue. We’ll be exploring a new topic each tune in, so when you’re faced with your next business decision, you have clear vision when making it. Again, if  you enjoy this podcast, please consider leaving a review with your favorite podcast aggregator. It helps people find us, so that we can help them. Once again, this is Mike Blake. Our sponsor is Brady Ware & Company. And this has been the Decision Vision Podcast.

Decision Vision Episode 4: What Corporate Form Should I Choose? – An Interview with Anita Anand, Brady Ware & Company

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Decision Vision
Decision Vision
Decision Vision Episode 4: What Corporate Form Should I Choose? - An Interview with Anita Anand, Brady Ware & Company
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Mike Blake and Anita Anand

Choosing the Correct Business Structure

Michael Blake, Director of Brady Ware & Company and Host of the Decision Vision podcast, interviews Anita Anand, Director of Brady Ware & Company on the decision process on a corporate business structure, how recent tax law changes might dictate a change in corporate entity selection, and other questions related to corporate structure.

Anita Anand, Esq., Brady Ware & Company

Anita Anand, Director, Brady Ware & Company

Anita Anand, Esq. is a licensed attorney and has over 10 years of experience consulting with businesses to help them align their long-term business and financial objectives with a tax strategy that minimizes their overall exposure. Anita specializes in technical international, federal, state, and local tax research and consulting. She provides taxpayer representation in matters requiring federal and state private letter rulings and is responsible for international, federal, state, and local technical tax support involving a range of clients and industries. Anita works closely with the tax team to provide quality control in all aspects of Brady Ware’s tax division. Anita is also the author of articles and white papers on various subject matters. She has presented at conferences and led training sessions and initiatives. Anita is a graduate of Georgia State University College of Law.

Michael Blake, Brady Ware & Company

Mike Blake, Host of “Decision Vision”

Michael Blake is Host of the Decision Vision podcast series and a Director of Brady Ware & Company. Mike specializes in the valuation of intellectual property-driven firms, such as software firms, aerospace firms and professional services firms, most frequently in the capacity as a transaction advisor, helping clients obtain great outcomes from complex transaction opportunities. Mike is also a specialist in the appraisal of intellectual properties as stand-alone assets, such as software, trade secrets, and patents.

He has been a full-time business appraiser for 13 years with public accounting firms, boutique business appraisal firms, and an owner of his own firm. Prior to that, he spent 8 years in venture capital and investment banking, including transactions in the U.S., Israel, Russia, Ukraine, and Belarus.

Brady Ware & Company

Brady Ware & Company is a regional full-service accounting and advisory firm which helps businesses and entrepreneurs make visions a reality. Brady Ware services clients nationally from its offices in Alpharetta, GA; Columbus and Dayton, OH; and Richmond, IN. The firm is growth minded, committed to the regions in which they operate, and most importantly, they make significant investments in their people and service offerings to meet the changing financial needs of those they are privileged to serve. The firm is dedicated to providing results that make a difference for its clients.

Decision Vision Podcast Series

Decision Vision is a podcast covering topics and issues facing small business owners and connecting them with solutions from leading experts. This series is presented by Brady Ware & Company. If you are a decision maker for a small business, we’d love to hear from you. Contact us at decisionvision@bradyware.com and make sure to listen to every Thursday to the Decision Vision podcast. Past episodes of Decision Vision can be found here. Decision Vision is produced and broadcast by Business RadioX®.

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Show Transcript:

Intro: [00:00:01] Welcome to Decision Vision, a podcast series focusing on critical business decisions brought to you by Brady Ware & Company. Brady Ware is a regional, full-service accounting and advisory firm that helps businesses and entrepreneurs make visions a reality.

Michael Blake: [00:00:22] And welcome to Decision Vision, a podcast giving you, the listener, clear vision to make great decisions. In each episode, we’ll be discussing the process of decision making on a different topic. But rather than making strict recommendations because everyone’s circumstances are different, we’re talking to subject matter experts about how they would recommend thinking about that decision.

Michael Blake: [00:00:42] My name is Mike Blake, and I am your host for today’s program. I’m a Director at Brady Ware & Company, a full-service accounting firm based in Dayton, Ohio with offices in Dayton; Columbus, Ohio; Richmond, Indiana; and Alpharetta, Georgia, which is where we are recording today. Brady Ware is sponsoring this podcast. If you like this podcast, please subscribe on your favorite podcast aggregator, and please consider leaving a review of the podcast as well.

Michael Blake: [00:01:07] So, today, we’re going to talk a little bit a hard accounting. We haven’t done that yet on the program. We’ll probably do it in a few episodes along the way. And we’re not necessarily going to get that technical, but this just in, you may have heard that the tax law changed radically at the end of last year that has changed the way that businesses are making decisions and making businesses kind of rethink decisions they may have made last year, five years ago, 10 years ago, 20 years ago.

Michael Blake: [00:01:41] And one of those decisions that when businesses, typically, are started – and maybe they changed along the way – is the corporate form. In other words, are you a C Corporation, and S corporation, you’re a limited liability company, and so forth? And there are many reasons or factors that drive that decision initially. But, quite candidly, one of them is what is your tax liability going to be. And depending on your corporate form – if it’s done correctly, and matches up with how your business makes money, and how you make money from your business – that’s going to drive what form of corporation or what corporate form you decide to take.

Michael Blake: [00:02:21] And what we’re finding at Brady Ware is that a lot of clients now and others are coming to us and asking, “Well, given these changes in the law, am I the right corporate form to frankly maximize or optimize my tax liability?” Nobody that I know likes to pay more taxes than than they absolutely have to. I know I’m not tipping the federal government when I write mine out. But, unfortunately, I know almost zero about it other than what I just talked about for the last 30 seconds.

Michael Blake: [00:02:52] So, we’ve brought in a subject matter expert. And I’m joined by my colleague, fellow director, and good friend, Anita Anand. Anita is a Director at Brady Ware, and she’s a licensed attorney and tax director at Brady Ware. She has over 10 years of experience consulting with businesses to help them align their long-term business and financial objectives with a tax strategy that minimizes their overall exposure. She believes it is necessary to take the time to understand what her business clients have done to achieve the success they have and where they plan to go. She, then, uses her broad knowledge of US and international tax laws to develop strategies and the most efficient tax structure to keep clients fully compliant at the lowest expense.

Michael Blake: [00:03:37] Anita has worked with a broad range of companies including technology, manufacturing, renewable energy, construction, real estate, and many other industries. She has helped them craft strategies to deal with federal state and local taxes, as well as inbound and outbound international tax issues. Along with these day-to-day responsibilities, Anita contributes her expertise to a number of local government agencies, industry organizations, and nonprofits. She is a guest lecturer at Georgia State University and the University of Georgia. Anita is also the author of various articles and whitepapers on various subject matters. In fact, I think she’s the most prolific writer in the firm, and she’s always writing something.

Anita Anand: [00:04:14] You’re so sweet, Mike.

Michael Blake: [00:04:15] She is presented at conferences, authored articles, and led training sessions and initiatives. Anita is a graduate of Georgia State University’s College of Law. And on a personal note, Anita was actually the first person that I met outside of the interview process before I joined the firm. And I remember very clearly that she was kind of one of the first to kind of welcome me, and we’ve latched on to each other because the two of us are the two non-CPAs-

Anita Anand: [00:04:39] That is true.

Michael Blake: [00:04:41] … in the firm at the director level., right. And so-

Anita Anand: [00:04:45] Right, very true.

Michael Blake: [00:04:45] And that-.

Anita Anand: [00:04:45] We got to stick together, Mike.

Michael Blake: [00:04:46] We do have to stick together. But that having been said, you studied tax, I have not. So, it’s just delightful to welcome you to the program. We’re going to have some fun today while we help people work through this decision.

Anita Anand: [00:05:00] I look forward to it. Thanks for having me.

Michael Blake: [00:05:02] So, Anita, I’ve given, sort of, this introduction, but I’d like you to kind of humanize a little bit. Talk about what you do at Brady Ware, and how you’re helping clients on a day-to-day basis.

Anita Anand: [00:05:12] Yeah. So, like you, said I’m a director with the firm. I spearhead the international tax practice. And so, because I’m a lawyer by trade and not a CPA by trade, I come at it from a slightly different angle in that tax consulting really is my specialty. So, I work a lot with clients, whether they’re individuals or businesses, here in the US that are wanting to expand their operations or their work in foreign jurisdictions and vice versa, right. So, if we have, let’s say, a company that has already established their business in foreign markets, and, now, they want to expand into the US, helping them understand what US tax rules are, how they work, what the regime is like, and what kind of an impact they’re going to be probably faced with is really what I like to kind of help them plan with.

Anita Anand: [00:06:03] But outside of the international, my foundation is technical tax. That’s what my career has always been. So, I also serve as a resource to others across the firm on technical tax matters, which vary all across the spectrum. So, if there is, let’s say, a client that has maybe a little bit more of a complex issue that requires some more technical tax research, looking into trying to figure out maybe how IRS may interpret a specific set of facts and circumstances, really diving into those types of situations, and then advising the clients appropriately. So, that’s just a very nice way, I think, of saying that I’m a tax nerd, but I enjoy it. I enjoy it. My job is to understand how these tax rules work, and then help explain to clients what it means to them.

Michael Blake: [00:06:53] It’s okay to be a nerd. The nerds rule the world, man.

Anita Anand: [00:06:55] That’s okay. Right, yeah.

Michael Blake: [00:06:56] The nerds are the ones driving Teslas. The nerds are the ones with second and third homes.

Anita Anand: [00:07:00] There you go, right?

Michael Blake: [00:07:01] You know, it’s all good. So, if you’re the nerd that everybody comes to for things tax, I mean, that’s not a bad place to be. So, what does being a tax expert an advisor mean? I mean, you talked a little bit about, sort of, being a tax nerd, but it goes a little bit beyond that, doesn’t it?

Anita Anand: [00:07:18] It does. It does. And, I think, the overarching goal for any tax advisor – and this is the way I view it – is you really are taking what is a complex set of rules that in the federal income tax code, you’re taking the code, you’re taking the regulations associated with it, the guidance IRS has issued along the way, and trying to, number one, keep up with that, understand what that means, interpret it correctly. But then, more importantly, be able to communicate that to a client in a way that they understand, right. It’s no different than, for example if I go to a doctor not feeling well, and they spit out all of these medical terms that have 15-18 syllables to it. Well, he or she could be the most brilliant person on the face of the earth, but they’re not communicating to me in a manner I understand what it means.

Anita Anand: [00:08:09] And so, I kind of take tax advisory in that light where our job is to really take something that the average person probably doesn’t even want to deal with. And it’s our job to make them understand how it impacts their business. But that’s also a loaded job description, right, because that includes that the advisor needs to be keeping up with all these tax law changes, which is constantly in a state of flux, not only on a federal level but international implications, state and local tax implications. So, there’s a lot to always keep up with.

Anita Anand: [00:08:43] But then, I think, what also sets maybe tax advisors apart from just true tax compliance, because I view tax compliance as you’re looking in the rearview mirror, you’re reporting what has already happened; whereas, I think, one of the key aspects of a tax advisor is to have more of a proactive approach, work with clients from the beginning, and more so on the front end, and along the way in terms of, “Hey, how’s the business going? How are we seeing things go? What is the ultimate goal here? What are things you should be aware of? How they’re going to impact you? What are you thinking about? What aren’t you thinking about that you should be thinking about?” That way, we’re making sure that clients are in the best position possible to make the best business decisions understanding tax impacts along the way.

Michael Blake: [00:09:29] I think that’s a very smart comment that you made that I want to highlight because I think it’s that important that it’s worth going off script to do that. There’s a big difference between being an analyst and an advisor, isn’t there?

Anita Anand: [00:09:43] There is.

Michael Blake: [00:09:43] And when you’re an analyst, you often talk about either, “Here’s what happened,” right, or “If A, B. C happened, then, sort of, here’s the flow chart, and here’s what will happen. Here’s kind of what the math says. And here’s what the law clearly says.” The advisor’s job is a lot less comfortable, isn’t it?

Anita Anand: [00:10:04] It is. And you have to be okay with the — You have to get comfortable with the uncomfortable. And that is difficult to do because nobody likes to be in that gray space. And in my experience, and especially in light of tax reform, a lot of tax professionals are stuck in that gray space.

Michael Blake: [00:10:23] And it’s even worse now, right?

Anita Anand: [00:10:25] It is.

Michael Blake: [00:10:25] Because you’re talking about changing rules and changing regulations. As I understand, in many ways, the IRS has not decided or, at least, has not chosen to share with us yet-

Anita Anand: [00:10:35] Correct.

Michael Blake: [00:10:35] … what they’ve decided the rules actually mean, right? So, in a lot of cases, to be perfectly candid, we’re all, not just Brady Ware but every CPA who’s being intellectually honest-

Anita Anand: [00:10:46] Right.

Michael Blake: [00:10:47] … is making a best guess based on available information that could turn out to be wrong.

Anita Anand: [00:10:52] Absolutely. And I think that’s another thing that’s going to set what I believe tax advisors into different buckets is being honest with clients. I understand we have — I’ve had to have these conversations multiple times with clients as clients are expecting an answer. When they come to you, they are expecting an answer on, “Okay, this is my issue. Tell me what I need to do.” And we need to be honest in that we are in this state of flux, and that there is so much that is unknown. But given what we know as it stands right now, this is what we believe to be where we think IRS is going to come out on it, but with the caveat that it could completely change because we just don’t know what we don’t know.

Michael Blake: [00:11:36] And does your legal training help you with that? I mean, the law is the law, but, on the other hand, the law is the law until it gets in front of a judge and jury.

Anita Anand: [00:11:43] Correct. It did, it did. But I also think it’s also experience along the way. The legal training helps you analyze what is already in front of you. It helps you interpret, okay, if you’re looking at, let’s say, 10 tax court cases on a particular issue, and eight have gone a certain way, and two have possibly gone a different way, to kind of help analyze what that really means. So, it has provided the analytical skills that I think I have, but there is still that second part of the equation, which is being okay with communicating your analysis accurately and honestly with a client, which just, I think, comes with experience.

Michael Blake: [00:12:29] So, I want to go out on a limb and say you didn’t necessarily, when you’re eight years old, say, “I want to become a tax advisor.”

Anita Anand: [00:12:37] No.

Michael Blake: [00:12:37] Is that fair?

Anita Anand: [00:12:38] That is a fair statement.

Michael Blake: [00:12:39] Some people have done that. And maybe they go and do, more power to them, you didn’t, and I didn’t grow up saying, “I was going to be a business-” I didn’t know what a business appraiser was until I graduated from business school. So, what got you into tax advisory? What captivated you that you want to make that your career and you wanted to be an expert in tax?

Anita Anand: [00:12:57] It’s really funny that you asked that question because I’ve asked that question of myself a couple of times along the way.

Michael Blake: [00:13:04] During busy seasons?

Anita Anand: [00:13:05] Yeah, yeah, yeah. Every year between that February and April timeframe. So, early on in my career, I never at all thought that I was going to do tax. Honestly, doing my own personal income tax return that one time a year was enough tax I ever needed to be exposed to. But I got a good opportunity in tax and, obviously, in the tax advisory role. And I went in with a certain set of expectations, and I was actually pleasantly surprised. So, I stuck around. And over time, that’s how I built my career.

Anita Anand: [00:13:40] But along the way, obviously, you learn a lot about yourself as an individual and as a professional. And when I look back at really what made me stick around in the tax space is, I think, believe it or not, in a weird way, I think, I like problem solving. And tax advisory is that every day. It’s not necessarily that a client is coming to you, “Hey, I have an IRS audit. Now, please fix this for me.” It’s advising clients along the way and what they’re trying to do. There’s a constant “problem” that business owners are constantly faced with. And so, you’re able to advise them on that.

Anita Anand: [00:14:18] So, it’s problem solving that I enjoy. And then, I enjoy working with people. So, I like getting to know my clients, and understanding what their business is, where their goals lie. And, obviously, building that kind of professional relationship where they believe that you are a valuable member to the team. So, I think all of those things put together have made tax advisory a good fit for me, which is I guess why it’s been working pretty well.

Michael Blake: [00:14:46] It has worked pretty well. You’re a brand director, so.

Anita Anand: [00:14:49] That is right. That is right.

Michael Blake: [00:14:51] Can you think of a neat success story you’ve had with the clients, something you really, really either helped them out of a bind or helped them frankly just save a lot of money that they’re going to be on the hook for?

Anita Anand: [00:15:02] Yeah. I’ve been blessed with quite a few clients’ situations where we were able to get them out of what I’m going to just call a pickle. I had a client that specifically came to me from a prior CPA firm. They were in the midst of a complete reorganization, corporate reorganization. And the amount of dollars that were involved were quite significant. And so, the way the prior CPA firm was advising them to pursue this reorganization was going to be a completely taxable event, and it was going to cost them a lot of money.

Anita Anand: [00:15:41] So, when they came to me, we had some certain discussions, and we really  to dive in to some of the tax rules in terms of, could they possibly benefit from a tax-free reorganization? So, we worked very closely with our legal team to stay within the parameters of the law and what is allowed. And, in fact, what the tax liability their prior CPA had estimated to them, we were able to completely wipe it out.

Anita Anand: [00:16:08] So, that was one of the success stories that I kind of hold on to quite a bit and it saved them millions of dollars. So, quite significant on their end as well. But my success story is truly where I find the successes when you have a client that achieved success, and you’re a valuable member to the team that helped them do it, and they look at you as being a valuable member to the team. And that in and of itself is success.

Michael Blake: [00:16:35] Yeah, that’s what it’s all about, right? And that is the stimuli.

Anita Anand: [00:16:36] That’s what are in it for everyone.

Michael Blake: [00:16:38] So, all right. So, let’s talk now about entity conversions. Why are people talking about them so much now? Why is there so much chatter about, “I want to convert from C, to S, to SSC, or something else”?

Anita Anand: [00:16:51] Well, it’s this little thing called tax reform that you had alluded to.

Michael Blake: [00:16:54] Oh, yeah, I heard of that.

Anita Anand: [00:16:54] Yeah, that little thing that happened at the end of 2017. The tax cuts and Jobs Act was the tax reform package really. And it was high time for tax reform. If you go back and you think about the last major tax regime overhaul, it was back in 1986. So, the fact that this last one was done in 2017, I mean, you’re talking 30 plus years later. So, it was high time for there to be, I think, a little bit more of a look towards our tax laws, our tax rules, and modify them to be in line with the current marketplace and business realities of our country

Anita Anand: [00:17:32] So, with  reform though, we had a number of different changes. And one of the most talked about is the reduced corporate tax rate. So, we went down from 35% to 21%. And, now, that has raised this conversation amongst various taxpayers, “Does it make sense for me to use a traditional corporate structure? Because before, it was going to cost me 35% at the corporate level. Well, now, it’s lower. So, should I be thinking about a conversion?” So, that’s truly what has sparked it, and all the conversations that we’re hearing and reading about.

Michael Blake: [00:18:08] And what are clients converting from and to in order to take advantage of that?

Anita Anand: [00:18:14] So, at this point, a lot of clients are thinking about converting from what’s called a pass-through entity, which is like your traditional partnership as corporation limited liability company or LLC to a C corporation. So, that’s what, I think, the conversation is and that discussion point is right now is I’m taking what — There really is no corporate entity. It’s a pass-through. And does it make sense now for me to convert that pass-through entity to a traditional C corporation?

Michael Blake: [00:18:45] Now, that’s kind of different from, at least, what I’ve encountered maybe that’s because that’s where valuation comes in, but I’m more used to seeing C to S form conversions, right?

Anita Anand: [00:18:58] Right.

Michael Blake: [00:18:58] Is going back the other way more or less complicated than C to S, or about the same?

Anita Anand: [00:19:03] So, it’s very — Okay. I want to caveat this, but it’s simpler to go from a pass-through entity like an S to a C, or a partnership to a C, or LLC to a C. But going the other way is a little bit more difficult. You’ve got a lot more considerations that go into that, and there’s usually some pain and cost associated with it. And so, that’s kind of part of the conversation that we’re having with our clients right now is, sure, we can talk about this conversion. We can do the modeling. We can certainly walk you through it. But just know that as easy as it is to maybe check the box and convert to a C corporation, in the event two years down the road, you wanted to go back, there’s going to be some cost. So, the short answer to your question is it’s really just not that easy to go back once you’ve elected to be a corporation.

Michael Blake: [00:19:59] So, you better be sure?

Anita Anand: [00:20:01] You should be sure.

Michael Blake: [00:20:02] And I mean, again, I’m not an account, but my impression is the IRS generally is not a huge fan of changing corporate forms all the time like share changes-

Anita Anand: [00:20:13] Right.

Michael Blake: [00:20:15] … outfits in a concert-

Anita Anand: [00:20:17] Absolutely.

Michael Blake: [00:20:17] … because you want to optimize your tax rate.

Anita Anand: [00:20:19] Right, right.

Michael Blake: [00:20:20] So, they’re not a huge fan of that.

Anita Anand: [00:20:22] No.

Michael Blake: [00:20:23] So, can we say there’s a bottom line or a blanket statement? Or I’m going to rephrase the question actually. And the question is, what are kind of the criteria that makes a company a good candidate for a pass-through entity conversion to a non-pass-through entity conversion? What’s kind of that checklist look like?

Anita Anand: [00:20:45] Mike, that’s a really good question. But, unfortunately, there is no one-size-fits-all. And the reason I say that is because there were so many different moving pieces in tax reform that there are new benefits that are afforded to those businesses that are operating as a pass-through entity. And, now, there are new benefits that are afforded to those that are operating in a traditional corporate structure.

Anita Anand: [00:21:11] So, it’s kind of hard because you’re not really comparing apples to apples. So, what you really need to look at, I can tell you kind of what maybe the logic should be, and the logic should be taking a closer look in terms of what is your business today; what are your near-term and long-term goals; what type of activities are you engaging in; are you expanding in international markets; are you investing in real estate? What is it? Where is your income coming from? Because those are going to help, I think, really determine whether one particular type of structure is better than others.

Anita Anand: [00:21:49] And then, from there, you really have to do modeling. It’s very easy to speak conceptually and in big picture, but, at the end of the day, what everyone wants to know is the bottom line. It’s, how much is this going to cost me? And the thing is whatever structure you choose, it’s an annual cost. There’s an annual cost associated with it. That’s your tax liability.

Anita Anand: [00:22:10] So, you got to put pen to paper or, in this case, maybe have some intricate and complex spreadsheets, but to really help understand, “Okay. Well, if I do it in a partnership form, could I maybe tap into certain benefits there?” So, for example, like under tax reform, there’s a new deduction that’s afforded to certain qualified business income of qualified trades or businesses that’s afforded in partnership, or S corporation, or even sole proprietorships that is not available to a C corporation. But, now, the C corporation has a lower tax rate. They have other benefits that could potentially be taken advantage of, let’s say, if there’s some exports or something going on.

Anita Anand: [00:22:53] So, you just have to understand what different pieces kind of fit together, and then be able to compare both of them, and see what works out better. In my experience, the conversations that I’ve had with clients, it really has been a toss you kind of go in thinking that, okay, a conversion might actually prove to be beneficial. But then, when you put that pen to paper, you see that maybe not and vice versa. So, it’s really, unfortunately, the facts and circumstances are going to dictate.

Michael Blake: [00:23:22] And, sometimes, the cure is worse than the disease.

Anita Anand: [00:23:25] Correct.

Michael Blake: [00:23:26] Right? So-

Anita Anand: [00:23:26] Yeah.

Michael Blake: [00:23:26] All right. So, I want take a step back for just a second because I’m sure some of our listeners don’t geek out on this accounting stuff. So, I want to take a step back and do a little bit of remedial tax accounting 101. And that is at the outset, generally, why do people check that box they’re going to be a pass-through entity to begin with versus a non-pass-through entity? What generally kind of drives that decision initially?

Anita Anand: [00:23:55] So, I think, first and foremost, the overarching benefit of having a pass-through entity is the fact that you truly get passed through of income loss, credits, deductions, whatever may be generated from the business. So, let’s take a structure. Let’s assume that we’ve got a partnership that owns a business. The business is profitable. And so, whatever income is generated from the business is reported at the partnership entity level.

Anita Anand: [00:24:26] So, the partnership itself will file a tax return, but the partnership itself does not pay an income tax. Instead, the partners get their pro-rata share of income, and all the other items of tax that are allocated to the partners. And then, they report their income on their personal income tax return based on whatever tax bracket they may be in. So, that’s your traditional pass-through. You don’t have the two layers of taxation, but you’re afforded, obviously, limited liability, right, with having a certain type of a limited liability in their partnership or S corporation.

Anita Anand: [00:25:00] Nowadays, like I was mentioning earlier, because of tax reform with this new deduction now, there’s an additional reason or an additional benefit to operate in the form of a pass-through, which is called this qualified business income deduction, which is up to a 20% deduction on certain types of income from certain types of qualified trades or businesses. The thing you need to know about tax is when the I–RS is offering a tax credit or a deduction, they’re qualifying it. So, you need to make sure you truly are eligible. But-

Michael Blake: [00:25:30] You can’t just say, “Hey, it’s all good.”

Anita Anand: [00:25:33] Exactly, right. You can’t just assume you’re going to be eligible for anything. So, there are quite a bit of caveats. And so, you want to make sure you’re eligible for it. But that is another benefit that’s afforded to pass-throughs that isn’t afforded to your traditional corporation.

Anita Anand: [00:25:48] And then, if you kind of go to — Let’s go to like an LLC structure, right. If you have an LLC with just one  So, like I set up an LLC, I’m the only one in it, well, I’m afforded the limited liability from a legal standpoint, but for tax purposes, that LLC is treated as a disregarded entity. So, what that means is I don’t even have a compliance requirement at that LLC level, but I still get the benefit of the flow through.

Anita Anand: [00:26:17] So, flow-throughs have quite a bit of benefits, and there’s a little bit more flexibility associated as well with pass-through entities that aren’t necessarily available in the corporate structure. But I think those are kind of, I think, your main points that have had people gravitate towards a pass-through structure as opposed to some others.

Michael Blake: [00:26:38] Okay. Now, a big part of your practice, an increasing part of your practice is international, and you do a lot of work particularly in Latin America, but a bunch of other places too. Is this change in the law, this discussion of corporate form conversion, having an impact in companies doing a lot of international business?

Anita Anand: [00:26:58] It most definitely is. So, if you take a step back and try to understand part of what was going on from the legislative side in tax reform, I think, a lot of what the US was realizing was that US companies are choosing to do business in foreign jurisdictions because of the tax rates in the US. It’s that they were just too high. And so, there was an effort to try to incentivize businesses to bring those operations back into the US.

Anita Anand: [00:27:31] And so, part of it is bringing the corporate tax rate down from 35% to 21%. But then, there were other incentives that were added as part of the tax reform package that are only afforded to corporations that have an international presence that are not afforded to those that are operating through a pass-through entity.

Anita Anand: [00:27:50] So, for example, now, obviously, because the corporate tax rate has come down, it’s making it, (1), just more attractive; but (2), if you have, let’s say, a US company that is providing services or selling goods to an unrelated third-party, that happens to be a foreign person for ultimate foreign use and consumption, they’re eligible to tap into a tax deduction benefit that is only afforded to corporate taxpayers, not afforded to a partnership or an S corporation.

Anita Anand: [00:28:22] So, there’s that benefit that, again, if that’s, kind of, the line of business you’re in, that may tip the scale in the favor of operating in a corporate form. Other types of benefits, especially in the international space, what we have is a lot of US corporations that have ownership and controlled foreign corporations. And so, now, there’s  received deduction for those dividends that are truly foreign-sourced. So, that’s an added benefit, again, only to corporate taxpayers.

Anita Anand: [00:28:56] But, also, in light of tax reform, there were also some new taxes that IRS decided, or Congress decided to go ahead and enact. And so, to to help offset the overall tax cost, there are deductions to help, like I said, offset that tax liability, but that deduction is only available to corporations not available to pass-through. So, a couple of those different pieces put together are making an impact, especially for those with an international presence. So, I think, the analysis is slightly different for those with a multinational footprint than those with just a domestic operation.

Michael Blake: [00:29:34] Okay. Let me switch gears here a little bit. I’d like to talk about a topic near and dear to my heart, which is startups. In my experience, most startups — Well, if a startup is going to start — If they think they’re going to raise venture capital, they may start out as a past-through, but they wind up migrating to being a C corporation.

Anita Anand: [00:29:55] Right, right.

Michael Blake: [00:29:55] They do that because, one, it allows them to issue multiple classes of stocks, like preferred shares; and the other is that venture capitalists don’t want to have passed-through gains.

Anita Anand: [00:30:06] Right.

Michael Blake: [00:30:07] They’re profits that they have to pay taxes on.

Anita Anand: [00:30:08] Right.

Michael Blake: [00:30:09] Because it deprives the company of cash. Is that calculus now changing because of the tax law? The tax law, now, driving something else.

Anita Anand: [00:30:20] Yes and no. And, I think, some of the considerations as it relates to startups remain the same. Typically, startups, what we  see is that in the first few years, there’s just a lot of losses. And so, a pass-through structure is attractive for the reason that, as a name implies, is you get the pass-through of those losses to the individuals versus that getting trapped at a corporate level, right. So, if they had set it up as a corporation from the beginning, whatever losses are being generated, they get stuck at that corporation level, and they don’t really, or they’re not able to be realized, or benefits are not able to be realized at the individual shareholder level.

Anita Anand: [00:31:04] So, I think that consideration still holds true. But I think, to your point, what we have seen in the past and what we will probably continue to see is, over time, as they get closer to raising capital, there is going to be maybe not necessarily a tax decision that’s the primary driver but more so a business decision to elect to be treated as a C corporation instead, and more so because of the VC money. If the VCs are expecting it to be a corporate structure, they’re the ones that are bringing the money to the table. So, naturally we want to please them, right?

Michael Blake: [00:31:40] Yeah.

Anita Anand: [00:31:40] So, that’s what we’ve seen in the past, and I think we’ll continue to see that. I think, our experience has been that some VCs – and this is maybe where I defer to you – Some VCs, I think, are starting to get maybe a little bit more comfortable than what we used to see 10 years ago with a pass-through entity structure but, still, traditionally, I think, most still expect to see that corporate form in place.

Michael Blake: [00:32:00] Yeah. In my experience, I see Angel investors, particularly if they only have one or two investments, they’re okay with an LLC because when there are pass-through losses, they can actually use them, right, but if you’re an investor, and you’ve got eight of these startups, right, you’ll never be able to use all the losses. They’ll just expire before you’ll be able to use them, right?

Anita Anand: [00:32:24] Right, right.

Michael Blake: [00:32:24] So, you may as well go ahead, at least, in some of these entities, make it a C Corp because you can’t benefit from the past-through losses anyhow.

Anita Anand: [00:32:30] Right, right. The only thing that is just going to make that decision a little bit easier is that, obviously, if you’ve got a company that’s now choosing to be a C Corp because of VC money or whatever other reasons might be associated with it, it’s not that 35% income tax rate that you’re looking at that’s glaring at you with flashing lights and everything. It’s 21%, which seems to be a little bit more tolerable.

Michael Blake: [00:32:55] By the way, I’m going to note something to our listeners. This is the first time in my life I’ve said three correct accounting things in a five-minute period.

Anita Anand: [00:33:01] We’re so proud of you, Mike.

Michael Blake: [00:33:02] Thank you very much.

Anita Anand: [00:33:02] We are so proud of you.

Michael Blake: [00:33:03] Thank you very much. I’m going to give myself a little present at the end of the day. All right. So, this is, obviously, very complex, right? This is not something we can solve for anybody over a 30-minute — I don’t think you could solve with a 30-minute conversation directly with a client, right?

Anita Anand: [00:33:20] Right, right.

Michael Blake: [00:33:20] So, can you provide some guidelines on how to think about this decision, right? At least, some of these interests now piques like, “Gee, I’m a C. Maybe I ought to be a pass-through and start not pay so much in taxes.” What can they think about to make that decision to e-mail you, call you, decide if this is kind of a worthwhile pursuit on their part?

Anita Anand: [00:33:45] Right. I think, first and foremost, I think, you need to really sit down and take a step back. I think a lot of business owners, they kind of know what they’re expecting and what they want out of their business, but because they get involved sometimes in the day-to-day, we don’t necessarily just take a step back and really think about, “What is our strategic goal? What is our strategic vision for the business? What are we doing today? What am I wanting to do tomorrow, 5 years down the road, 10 years down the road?

Anita Anand: [00:34:14] Think of that. Map that part out because talking to your tax advisor or talking to your legal team, they’re not going to be able to give you those answers, right. That needs to be driven by the business owner. But once you have that strategy laid out, then, I think, it’s prudent to go ahead and initiate those conversations with a tax advisor and say, “Hey, you know what. This is kind of where I’m at right now. This is my current structure. This is what I’m expecting to do.”

Anita Anand: [00:34:39] Obviously, we understand we plan, and life  a different plan for us. So, we understand that, but I think if you have a roadmap to start with, that, at least, prompts the conversation for discussion and considerations. And then, from there, talk about the benefits of kind of what benefits are they currently realizing versus what are the benefits that they could be realizing under a different structure.

Anita Anand: [00:35:04] And then, you really have to do the modeling. You really do. I would go on record and say that, I think, any type of a conversion without modeling is a little scary because, again, you’ve got to put the pen to paper and really see how it all shakes out. So, do the modeling. And then, once you kind of know how the numbers shake out, then, I think, there’s still a second layer of considerations in terms of, okay, now, administratively, what is the cost of conversion? What are going to be my legal fees? What are going to be my tax fees? Other non-tax considerations for example.

Anita Anand: [00:35:41] So, if you have a client that’s got a partnership, and modeling the C corporation might be a more advantageous tax structure. Okay. Now, you’ve got to think about corporate formalities, articles of incorporation. Do I need to have annual shareholder meetings? How are my minutes going to be recorded? So, there’s other stuff to think about that’s not necessarily just tax considerations. And so, the conversation needs to be not only with your tax advisor but also your legal team because all these pieces need to fit together like a proper puzzle.

Michael Blake: [00:36:14] And to be clear, when you say modeling, we’re not talking about getting on a runway and strutting down, but rather, it’s doing the math, right?

Anita Anand: [00:36:22] Absolutely.

Michael Blake: [00:36:23] Opening up a spreadsheet. And just, at some point in business, there’s just no substitute for grinding out the number, right?

Anita Anand: [00:36:31] Right, right.

Michael Blake: [00:36:32] And one of the things that you guys are doing, and we do, is we help you grind through the numbers.

Anita Anand: [00:36:36] Absolutely.

Michael Blake: [00:36:36] So, if somebody wants to — If someone’s not sure, the listener to this podcast who think, “I’m not sure, but I don’t want to waste Anita’s time. She seems really nice and busy,” can they just sort of call you and get kind of a consultation to see if it makes sense.

Anita Anand: [00:36:53] Oh, absolutely, absolutely. I mean, that’s what we’re doing for so many. And, honestly, I would encourage it because as a business owner, you should be thinking about it. At least, ask the question. The answer may be you’re absolutely fine, but be thinking about it, and have these conversations. And I will say that I don’t believe that this conversation is going to be a one conversation and be done with it because as we’ve spoken about earlier in this conversation is there’s still so much to be learned in light of tax reform. We’re still waiting on more guidance to come out.

Anita Anand: [00:37:26] So, the conversation may actually be more of a continuing conversation because, again, ultimately, you want to be making the best decision for you out of a position of being in possession of as much knowledge as you’ve had.

Michael Blake: [00:37:41] Being informed, right?

Anita Anand: [00:37:41] Right. You want to be informed. You want to be educated. And, like I said, if you convert you can’t really go back without there being some tax pain and cost associated with it. So, you want to be really sure. And then, also, weigh the fact that some people are talking about, what’s the certainty? Will tax law change again? Okay, if we go ahead and convert, down the road, now, the rules are completely different, then what happens? And that is a risk, that is a factor, but you’ve got to weigh that with maybe some of these other considerations and really see how the scale tips.

Michael Blake: [00:38:16] That sounds cool. Somebody got to really do a podcast about making informed decisions. Well, never mind.

Anita Anand: [00:38:21] Yeah.

Michael Blake: [00:38:23] So, if someone wants to ask you, if someone wants to reach out to you and pursue this, how can somebody get a hold of you?

Anita Anand: [00:38:29] Well, the good thing is I think I’m pretty flexible. People call all the time, e-mail all the time, LinkedIn, Facebook. I mean, I’ve got clients that reach out to me a form of different ways. And so, I would encourage anyone to reach out in however they feel fit. Email, call, and want to schedule an in-person meeting, happy to do that as well. But I would encourage that conversation with someone, whether it’s me or whoever, just people you feel comfortable with but, at least, be having that conversation with your tax advisor because I think it is high time. And if they haven’t brought it up to you, you should probably bring it up to them.

Michael Blake: [00:39:07] And what’s your e-mail address?

Anita Anand: [00:39:08] It’s aanand@bradyware.com. So, aanand@Brady.com.

Michael Blake: [00:39:17] All right. So, there you have it. Everything that you want to know about corporate form conversion but may or may not have been afraid to ask. But you shouldn’t be afraid asking more because Anita really knows her stuff, and she’s pretty cool too. So, do ask.

Anita Anand: [00:39:28] Thanks, Mike.

Michael Blake: [00:39:28] Do ask to ask her about it.

Anita Anand: [00:39:31] Happy to help.

Michael Blake: [00:39:33] So, I’m going to thank Anita for coming on. This is great. This is, literally, thousands of dollars of free advice that you’ve just given. So, that’s awesome. And that’s going to wrap it up for this program. I’d like to thank Anita so much for joining us and sharing her expertise with us.

Michael Blake: [00:39:33] We’ll be exploring a new topic each week so please tune in. So, when you’re faced with your next business decision, you have clear vision when making it. If you enjoy these podcasts, please consider leaving your review with your favorite podcast aggregator. It helps people find us, so that we can help them. Once again, this is Mike Blake. Our sponsor is Brady Ware & Company, and this has been the Decision Vision Podcast.

Decision Vision Episode 3: Should Our Firm Have an App? – An Interview with Scott Burkett, Incursus

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Decision Vision
Decision Vision
Decision Vision Episode 3: Should Our Firm Have an App? - An Interview with Scott Burkett, Incursus
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Scott Burkett and Michael Blake

Should Our Firm Have an App?

Michael Blake, Director of Brady Ware & Company and Host of the Decision Vision podcast, interviews Scott Burkett on the decision process for building an app, understanding the business problems an app will solve, working with an app developer, and more.

Scott Burkett, Incursus

Scott Burkett is the Founder & CEO of Incursus.

Demonstrating a passion and commitment to quality and process improvement, Scott holds a certification in Six Sigma, and is a former director on the Board of the Carnegie-Mellon sponsored Software Process Improvement Network (SPIN). He played an instrumental role in a key client (AT&T Universal Card Services) winning the Malcolm Baldrige National Quality Award, as well as a 2,000+ person consulting firm achieving Ford Motor Company’s Q1 Quality Certification. An original contributor to the Linux kernel, Scott co-authored The Linux Programmer’s Guide, The New Linux Book, and Linux Programming Whitepapers. He was also a key contributor to the now legendary comp.lang.c USENET group.

Scott has been featured, quoted, or published in Money Magazine, The Wall Street Journal, Computerworld, TechJournal South, Datamation, WebSmith Magazine, The Linux Journal, and TechLINKS. He has been featured as a lecturer/speaker at events sponsored by such organizations as Georgia Institute of Technology (Georgia Tech), The University of Georgia, ATDC, Draper-Fisher Jurveston, NASAGA, APRA, ACPI, The Kettering Executive Network, ExecuNet, 400 Technology Connection, and i-Compass.

Incursus, Inc. is a boutique creative-design and open-source software solutions studio headquartered in Atlanta, Georgia. In short, “We Create Thingz®,” as they like to say! The Incursus team focuses on four key areas: creative design, custom application development, managed cloud services, and technical due diligence. Additionally, they have a program for startup companies aimed to help them affordably satisfy their technology needs.

They do not aspire to be the biggest provider of these services in the world. They simply aim to be the best. Period.

The Latin word Incursus — which can be translated into “raid”, “attack”, or “invasion” — represents their attitude towards their work — with swift forward movement into projects to get them done efficiently with skill and finesse.

Michael Blake, Brady Ware & Company

Michael Blake is Host of the Decision Vision podcast series and a Director of Brady Ware & Company. Mike specializes in the valuation of intellectual property-driven firms, such as software firms, aerospace firms and professional services firms, most frequently in the capacity as a transaction advisor, helping clients obtain great outcomes from complex transaction opportunities. Mike is also a specialist in the appraisal of intellectual properties as stand-alone assets, such as software, trade secrets, and patents.

He has been a full-time business appraiser for 13 years with public accounting firms, boutique business appraisal firms, and an owner of his own firm. Prior to that, he spent 8 years in venture capital and investment banking, including transactions in the U.S., Israel, Russia, Ukraine, and Belarus.

Brady Ware & Company

Brady Ware & Company is a regional full-service accounting and advisory firm which helps businesses and entrepreneurs make visions a reality. Brady Ware services clients nationally from its offices in Alpharetta, GA; Columbus and Dayton, OH; and Richmond, IN. The firm is growth minded, committed to the regions in which they operate, and most importantly, they make significant investments in their people and service offerings to meet the changing financial needs of those they are privileged to serve. The firm is dedicated to providing results that make a difference for its clients.

Decision Vision Podcast Series

Decision Vision is a podcast covering topics and issues facing small business owners and connecting them with solutions from leading experts. This series is presented by Brady Ware & Company. If you are a decision maker for a small business, we’d love to hear from you. Contact us at decisionvision@bradyware.com and make sure to listen to every Thursday to the Decision Vision podcast. Past episodes of Decision Vision can be found here. Decision Vision is produced and broadcast by Business RadioX®.

Visit Brady Ware & Company on social media:

LinkedIn: https://www.linkedin.com/company/brady-ware/

Facebook: https://www.facebook.com/bradywareCPAs/

Twitter: https://twitter.com/BradyWare

Instagram: https://www.instagram.com/bradywarecompany/

Show Transcript:

Intro: [00:00:02] Welcome to Decision Vision, a podcast series focusing on critical business decisions brought to you by Brady Ware & Company. Brady Ware is a regional full-service accounting and advisory firm that helps businesses and entrepreneurs make visions a reality.

Michael Blake: [00:00:22] And welcome to Decision Vision, a podcast giving you, the listener, clear vision to make great decisions. In each episode, we’re discussing the process of making decisions on a different topic, rather than making recommendations because everyone’s circumstances are different. We will talk it to subject matter experts about how they would recommend thinking about that decision.

Michael Blake: [00:00:40] My name is Mike Blake, and I’m your host for today’s program. I’m a director at Brady Ware & Company, a full-service accounting firm based in Dayton, Ohio, with offices in Dayton; Columbus, Ohio; Richmond, Indiana; and Alpharetta, Georgia, which is where we are recording today. Brady Ware is sponsoring this podcast. If you like this podcast, please subscribe on iTunes, and please consider leaving a review of the podcast as well.

Michael Blake: [00:01:02] So, today we’re going to talk about building an app, and not just the process of building an app. We, probably, won’t talk a lot about the process at all, but rather a decision of getting an app. So, lots of companies, now, are thinking that they’re kind of left out. They’re not in the cool kids club anymore if they don’t have an app. And so, everybody kind of wants one. But is that really the right — Is that the right decision? Is that the right place to put management time? Is that the right place to make investment? And is it really all it’s cracked up to be?

Michael Blake: [00:01:34] So, how do we go about making that decision? And to help us with that decision, I’ve invited my good friend, Scott Burkett. Scott is a 30-year veteran of the technology industry. He’s the Founder and Chief Executive Officer of Incursus Inc., a boutique creative design and open source software solutions studio headquartered in Atlanta. Incursus focuses on four key areas: creative design, custom application development, managed cloud services, and technical due diligence. Team Incursus, also, recently launched ticketburner.com, a web-based platform that focuses on customer service delivery by helping companies automate their business processes.

Michael Blake: [00:02:14] Prior to founding Incursus and TicketBurner, Scott served as a Chief Technology Officer for several companies, including MFG.com and Apto Solutions. Scott was also the founder of wwetcanvas.com, a large online community for visual artists, which is now owned by F+W Publishing, one of the largest privately-owned media groups in the country. Additionally, Scott has been very involved in the Atlanta area startup community for the past 15 years and was a Co-Founder of startuplounge.com, one of the early advocates for fast-growth entrepreneurship in the southeast. So, it’s my great pleasure to welcome to the program and recently released from prison-

Scott Burkett: [00:02:52] That’s right.

Michael Blake: [00:02:52] … Scott Burkett.

Scott Burkett: [00:02:53] Thank you. Thanks for — Thanks for being here, Mike.

Michael Blake: [00:02:56] Well, I’m [crosstalk].

Scott Burkett: [00:02:56] But the StartupLounge is here when we had our podcast.

Michael Blake: [00:02:59] This is sort of a role reversal. We did that podcast, you sort of drove this, and I was the foil. So-

Scott Burkett: [00:03:04] Well, that’s okay.

Michael Blake: [00:03:06] How does it feel to be Dean Martin now?

Scott Burkett: [00:03:08] Weird. I’m like Dean Martin without the drink.

Michael Blake: [00:03:11] Well, if you say so.

Scott Burkett: [00:03:13] Yeah, exactly.

Michael Blake: [00:03:15] So, let’s talk about, even the word “app” is kind of a new term in the English language, right?

Scott Burkett: [00:03:20] Right, yeah.

Michael Blake: [00:03:20] So, let’s make sure we have the right vocabulary when we start. What is an app? And when you think of an app or one of your clients thinks of an app, what are we talking about here?

Scott Burkett: [00:03:28] Well, generally speaking, when you hear someone use the word “app,” they tend to be referring to mobile devices, right. Your smartphone, download this app, download that app, or whatever, or maybe even your tablet or something like that. But I’m a software engineer by trade, so it kind of irks me when I hear app only being used that way. A lot of folks will refer to an app that way, but an app can be anything. It can be a web-based software product. It can be a desktop app, an application for your desktop. So, it’s a pretty broad term, but, yeah, it tends to get more love on the mobile side these days.

Michael Blake: [00:04:03] And so, is that where that’s now headed? Is every app a mobile app, or-

Scott Burkett: [00:04:07] No, not at all.

Michael Blake: [00:04:08] … do you see that there’s not an end for apps on a more conventional sense?

Scott Burkett: [00:04:11] I think, it’s hard to argue that the growth of mobile hasn’t played a role in this, right. I mean, there’s more mobile devices, phones, laptops, whatever, tablets than there are desktops. Just people aren’t buying desktop. They’d rather buy a smartphone and a tablet than buy a desktop. Unlike I’m a hardcore gamer, as you are as well.

Michael Blake: [00:04:31] You’re more of a game historian, I think, at this point. It’s true.

Scott Burkett: [00:04:34] But I still play them.

Michael Blake: [00:04:35] Long live Atari, baby.

Scott Burkett: [00:04:36] Exactly, but I’ll still have a high-end gaming rig at home and use desktop stuff, but most of the work that we do is on laptops or mobile devices these days. So, that’s a big shift.

Michael Blake: [00:04:48] So, when somebody comes to you and says, “We think we want to have an app for our company,” did you kind of walk them through the process? Is that the right path for them to go? Or how do you find the clients who are thinking about that? What does that decision tree look like?

Scott Burkett: [00:05:04] Well, it’s complicated because every situation is different, right. The first thing that we try to do at Incursus is dig into what the business problem is they’re trying to solve with it, right. We were talking at lunch here earlier about the cool factor behind apps. And that’s certainly out there, but the reality is 99.9% of our clients are going to come to us and say, “We need to build something to solve this particular set of problems.” And it could be to extend a web application to the mobile device, or it could be just greenfield app itself on a mobile device.

Scott Burkett: [00:05:37] So, you want to understand those business problems, right. And once those things line up, then you can kind of dive into what’s the next step. How do we prioritize these? How do we dig into them? And to make sure that their understanding of what a return on that investment is going to be is the same as your understanding of it because, at the end of the day, it has to drive some sort of value and trying to put that-

Michael Blake: [00:05:57] You’d like to [crosstalk]-

Scott Burkett: [00:05:58] Yeah, back to the-

Michael Blake: [00:05:59] Although it is cool just to have my logo on my phone.

Scott Burkett: [00:06:02] You have the light saber app, don’t you?

Michael Blake: [00:06:03] I do.

Scott Burkett: [00:06:04] I do, yeah. Hey, it’s at sword fight mode. We could actually-

Michael Blake: [00:06:06] We could, but it doesn’t work as well as audio.

Scott Burkett: [00:06:08] Yeah. I was going to make a bad crossing swords joke, but I’m not-

Michael Blake: [00:06:11] That’s all right.

Scott Burkett: [00:06:11] Did I just make a bad crossing swords joke?

Michael Blake: [00:06:12] It’s not that kind of podcast.

Scott Burkett: [00:06:14] That’s right. Family-friendly.

Michael Blake: [00:06:17] So, every sort of situation is different, which is kind of what we expect. So, is it fair to say that there are kind of two categories of apps? One is kind of outward-facing. You’re trying to have an app that is client-focused, client-facing, maybe let clients interface with your company a different way. And then, kind of, an internal app, something that makes the way your company works or operates more effective and more efficient. Is that a fair distinction?

Scott Burkett: [00:06:44] That is fair. The thing with the App Store is it’s a public utility effectively at this point, right. You go into it, and you find what you want. You pay for it or you get it for free. You download it. Most companies are probably not going to want you to download their internal applications from the app store, but we do see both. We do see both.

Scott Burkett: [00:07:01] I think, the biggest trend over probably the past, I’d say, the best decade, really, as the shift to mobile happened was you had successful web applications like Facebook, for instance, or LinkedIn, those kinds of sites, social media type sites in general that didn’t, initially, have a mobile app. And the mobile adoption is a lot greater now than it was when those companies were founded.

Scott Burkett: [00:07:22] So, the mobile strategy kind of came in later for them, but that became a way to interface with a larger platform on the desktop effectively. It’s the same product, right, but you’re limited to a certain set of features and certain experience on a mobile device that’s a little smaller in footprint than what you’d get on a desktop, for instance, right. But, yeah, that shift is definitely there.

Michael Blake: [00:07:44] Are we at a point now where you can realistically have an app that doesn’t have a mobile companion?

Scott Burkett: [00:07:50] Well, in that context do, we talked about web applications, right. On the B2B side, if you’re successful, you need to have a mobile app. It’s just your users are going to demand it. In fact, if you don’t eventually have a mobile app in your B2B type web application, your customers are going to go find another solution somewhere else because mobile’s that important in the enterprise now, right.

Scott Burkett: [00:08:13] My UPS guy who comes to the house and drops off packages, first thing he does is he pulls out his mobile device, and he’s got access to all this back in functionality at UPS that he’s like flipping around and doing all this stuff. I try to sign my name, it looks like my kindergartener signs it when I do my finger, but all that functionality is all on a mobile device. That’s a great example of an enterprise application on a mobile device right there. Not something you can download from the app store, but they have it. So, yeah.

Michael Blake: [00:08:39] So, apps, I mean, back in the old days, we used to call them software applications or programs. So, the words changed, but what we’re creating is largely the same. Does an app have to be something grandiose, like PowerPoint or Microsoft Word? Is this something that can be fairly slim? Walk us through that. Does an app have to be big, and hairy, and complex to be valuable? Are there ways to do something relatively quick and painless?

Scott Burkett: [00:09:10] I can tell you that 99% of the stuff that’s on my smartphone, my iPhone here, was put there by my kids. And the vast majority of things that are on there are simple silly things that add zero value to my life. So, the short answer is it doesn’t really matter, right. There’s an app for anything these days, you want to track your weight loss or whatever. And you’re still doing all the work, by the way. It’s not like you stand on the iPhone-

Michael Blake: [00:09:34] I don’t need an app for that by the way, but the math there is not that complicated or fast.

Scott Burkett: [00:09:37] You don’t stand on your iPhone. I want to write a trick app that it’s a scale for your iPhone, and you just stand on your iPhone, and I wonder how many people would do that. But there are apps for everything, small, large whatever. I don’t think people have to have a vision of something being grandiose or lightweight. I think they have to have a vision that their app — And I’m speaking more in a business context here — solves some kind of problem or fulfill some sort of need in a marketplace, right.

Scott Burkett: [00:10:06] So, it could be a game. It could be just pure entertainment or just a boredom breaker kind of a thing. And those things tend to be kind of lightweight. But when we start talking about business-to-business enterprise type integration, those things tend to lean towards the hairy side just by their very nature, right.

Michael Blake: [00:10:22] Got it.

Scott Burkett: [00:10:22] So, yeah.

Michael Blake: [00:10:23] All right. So, somebody comes to you and says, “Scott, we think we want an app. We’d like to have you build it.” Open the hood a little bit, what does that process kind of look like?

Scott Burkett: [00:10:33] Well, the first thing I do is I get out my incense burner. No, I’m kidding.

Michael Blake: [00:10:38] No, that’s what we do in valuation.

Scott Burkett: [00:10:39] no. The interesting thing about technology is that while technology has changed a lot over the past 20 years – let’s just say 20 years. It’s really longer than that. About 30 years, I guess, at this point. God, we’re getting old – the process by which you build it has nominally changed, right? Certainly, we have faster tools we have better tools, and libraries, and integrated environments that we can build all these great things in.

Scott Burkett: [00:11:04] And that’s condensed the timeframe for delivery of building something like that, but the process is still largely the same. You got to understand the requirements. Are there requirements? What are you trying to build? If you just have an idea you’ve got a lot more work to do. You could come to me with an idea, that’s great. I’m happy to help you walk through kind of flashing that out.

Scott Burkett: [00:11:21] But, at some point, you’ve got to put pen to paper, or well, we used to do that, but put your fingers on the keyboard, as it were, and type up your requirements. Well, what are the problems it’s going to solve? How is it going to solve? What are the benefits to the user? What are they going to reap by using this particular application? And it doesn’t matter if it’s on the web, or if it’s on a desktop, or if it’s a mobile app, the same principles still apply.

Michael Blake: [00:11:41] Now, having known you as long as I have, I know you’re a very creative guy. You’ve done-

Scott Burkett: [00:11:45] A few things, I guess.

Michael Blake: [00:11:47] You’ve done literally done art websites.

Scott Burkett: [00:11:50] That’s true, that’s true.

Michael Blake: [00:11:51] So, when you have that conversation or when somebody — I want to depersonalized a little bit. Is it reasonable to expect that if I’m looking for someone to help me develop my app, is the app developer going to, then, maybe interact with me and help flesh out what the business case might actually be, suggest additional functionalities, or is it more like an order-taking process where, “I need an app that does A, B, C, and D,” “Here it is, go”?

Scott Burkett: [00:12:17] Well, to the latter, there’s a million people that can do that, right? You can go to upwork.com, find a freelancer offshore somewhere, send them a bulleted list of stuff that you want to build, and they’ll build exactly that.

Michael Blake: [00:12:31] Okay.

Scott Burkett: [00:12:31] Okay. And it will be cheaper. By and large, it will be cheaper to do that. The problem is if your development team isn’t completely aligned with your business drivers, and in those sessions, and on the white board, and trying to understand how your business is evolving, and not just in a bulleted list, these are the things that are important to us, but understanding your customers and what they want. You’re going to paint yourself into a corner as a founder. You’re making an investment. Ostensibly, it’s a chunk of your savings, or you’ve raised some money maybe in a seed round or something like that, and you’re trying to build something. The last thing you want to do is know that you just wasted $100,000, or $50,000, or whatever it is by giving somebody a bulleted list because you think you’ve got all the answers, and you think that’s all they need. There’s always more to it than that.

Scott Burkett: [00:13:18] If I took a pile of building supplies and dropped them off on a lot that you owned, and said, “We’re going to build a house.” And you came to me and you said, “Okay. Here’s what I want. I want three bedrooms, and I want two baths, and I want a sunken den. That’s all it. That’s my main thing. I just got to have these things.” We’ll build it. We’ll build the house. It will have three bedrooms, two baths, and a sunken den. And then, you’re going to realize that you wanted brick, and you wanted one bedroom upstairs, and not all three. You didn’t want a ranch house, right? So, the house is still built. I did my job, right?

Michael Blake: [00:13:46] Yeah, yeah.

Scott Burkett: [00:13:48] And so, you run into situations like that. And more importantly, you run into situations where you realize you can’t add an extra room to your house because of the way the house was initially built, right? It wasn’t built to be extensible. We took up all of the real estate on that lot by building this house, right?

Michael Blake: [00:14:02] If we add here, that’s a support thing.

Scott Burkett: [00:14:04] That’s right, that’s right. That’s a load-bearing wall. We can’t take that down. So, you think about that from a development standpoint, developers, there’s something called technical debt, which may come up later in the show here. But technical debt is one of those things where it’s the — You’re familiar with monetary debt, right?

Michael Blake: [00:14:20] Of course.

Scott Burkett: [00:14:21] So, it’s financial debt, right? It’s very akin to that. When you’re building an application, and a developer takes the easy route, if you give me a bulleted list, I’m taking the easy route and implementing all this because I don’t know what you’re going to want to do a year from now or two years from now because I’m not in line with your business. So, I’m going to build those things, and I’m going to take the easiest fastest way for me to accomplish those tasks, and I’m going to do it. Okay.

Michael Blake: [00:14:43] Just satisfy the statement of work.

Scott Burkett: [00:14:44] That’s right, just satisfy the statement of work. So, fast forward a year from now, your business is pivoting, or you’re changing, you’re getting into a new market, you got a new partner that you want to integrate with or something like that. And all of a sudden, you realize you can’t do that because you have technical debt. You have to now re-factor, and take all the easy stuff out, and do it the right way where you can open those doors into integration with other companies and things like that in your code.

Scott Burkett: [00:15:07] So, when you think about giving someone a bulleted list, if anybody’s listening to this that is in that mode, don’t do that. Don’t give someone a bulleted list and a check and say, “Let me know when you’re done.” That’s absolutely the worst possible thing you could do.

Michael Blake: [00:15:23] So, one of the decision points, then, is do I, as a person who wants the app, do I have enough time myself to engage in this process, so that I get what I want? When you put an addition in your house, a great way to make sure you’re unhappy is just send the contractor off.

Scott Burkett: [00:15:39] That’s right. That’s right.

Michael Blake: [00:15:40] Not oversee the work, not get progress updates.

Scott Burkett: [00:15:41] That’s right.

Michael Blake: [00:15:41] It’s sounds like it’s the same thing there. You can’t just throw it over a wall.

Scott Burkett: [00:15:42] There’s basically there — I guess, three ways of looking at building an app, or three reasons, or drivers behind it. One is you’re writing something for yourself, which happens a lot with techies. Us, geeks, like to write tools that we use, and we think are cool. And that’s fine. You’re the only user of it, and you’re happy. That’s a success, right? Or you’re trying to monetize it, and actually grow business out of it, and turn it into something that’s a little bit more longer lasting than just you using a tool. And then the third one is the hobby market. You’re making something for other developers to use or other tool builders to use as a part of their applications.

Scott Burkett: [00:16:21] When you look at the second one, that example that you just gave about, “Am I going to have time to engage in this?” Well, if you’re writing it for yourself, and you don’t have time to engage in it, then I don’t even know what’s going on there. The third one is a hobby. It kind of falls back to the first one, which if you’re not willing-

Michael Blake: [00:16:35] You either do it or you don’t.

Scott Burkett: [00:16:36] Either do it or you don’t. If you’re trying to monetize it and build a business around it, you either find the time or you don’t. And if you don’t find the time, you’re just wasting your money.

Michael Blake: [00:16:43] Okay.

Scott Burkett: [00:16:44] Right? You have to engage. I think you absolutely have to engage with your developer. IT people and techies are not the same as they were even 20 years ago. They have business degrees now. They understand sales and marketing. They understand how companies work, at least, on the surface, right? They can understand those business drivers and apply them to how are we going to integrate with those partners in our app down the road. Things like that are going to open up for them. So, I think you absolutely have to find the time to engage with your development team no matter what you’re building.

Michael Blake: [00:17:12] Okay. So, I mean, apps sound great. It’s the way of the future. It’s all cool. Why doesn’t everybody have one?

Scott Burkett: [00:17:20] A lot of people don’t have a mobile strategy upfront. And we’re seeing this is a little bit different now because, I think, mobile strategy is one of the first things an investor is going to ask you, especially if you’re in the business-to-business side or building a web application that’s going to have a lot of users. What’s your integration strategy? What’s your mobile strategy? That’s one of the things they’re going to want to know. And if you don’t have one it’s going to be a strike against you. You’re not thinking big enough. You’re not thinking outright.

Michael Blake: [00:17:44] Right, because that’s where most of the devices are.

Scott Burkett: [00:17:47] Exactly. And that’s how we consume content, by and large, these days. I mean, I get my news from my smartphone. I don’t watch the news at night. Who does that anymore?

Michael Blake: [00:17:53] I can’t remember the last time I watched the news.

Scott Burkett: [00:17:55] Exactly.

Michael Blake: [00:17:55] Do you even do that anymore?

Scott Burkett: [00:17:56] Is Walter Cronkite still alive. No. Yeah, right. That’s the last news that I saw, right?

Michael Blake: [00:18:01] Right.

Scott Burkett: [00:18:02] Paul Harvey and Walter Cronkite, right? So, yeah. Someone’s listening to this going, “They’re Googling Walter Cronkite right now.”

Michael Blake: [00:18:08] Exactly.

Scott Burkett: [00:18:09] “Who is Walter Cronkite?”

Michael Blake: [00:18:09] Exactly. Going to the biography channel.

Scott Burkett: [00:18:09] How do you spell his name? Yeah. So, no, and people consume content on their mobile devices. So, mobile strategy is important. I think maybe a decade ago, 15 years ago, mobile was — I don’t want to say it was optional, but it was sort of like gravy. In fact, a lot of investors back then probably we’ll look at you and say you’re thinking too big. What’s this mobile thing? I mean, the world has changed. Obviously, it’s evolved. So, if they don’t have an app, then there’s either one of couple of obvious reasons for it. One is they don’t want to fund it. That can happen, right?

Michael Blake: [00:18:40] Yeah.

Scott Burkett: [00:18:41] They don’t see the value, in which case you want to short their stock, I think, at this point, right?

Michael Blake: [00:18:45] Got it.

Scott Burkett: [00:18:45] Certainly, if it’s an enterprise type company. And on the social side, I think any sort of social media app these days, application on the web is going to have a mobile component. If not designed kind of in counterpart with the web platform, it’s going to be built like shortly thereafter once they get all their integration points and everything is sort of in place where the mobile devic can communicate to the web app.

Scott Burkett: [00:19:06] So, I mean, when LinkedIn and Facebook first launched, they didn’t have mobile apps. This came along later. So, I don’t know how Facebook is now, but it’s probably 15 years old or something like that maybe.

Michael Blake: [00:19:18] It’s something like that, yeah.

Scott Burkett: [00:19:19] Something like that.

Michael Blake: [00:19:20] I mean they went public in — Went public in — Actually fairly recently. It went public in like ’13 or something. So, looking around 2006.

Scott Burkett: [00:19:28] Right. So, yeah. Yeah. So, there you go.

Michael Blake: [00:19:32] So, is there kind of a tale to this? It’s one thing to sort of build an app, but I have a feeling an app is not something you just buy once and put away, right?

Scott Burkett: [00:19:42] That’s right.

Michael Blake: [00:19:43] You put it online, and you’ve got to maintain it. Apps tend to get updated if they’re going to be around for long. So, is that the case that when budgeting and figuring out if an app is right for you? Do you have to think about six months from now, a year from now, kind of, what long-term commitment you’re going to make to it?

Scott Burkett: [00:20:00] Any business has to think about that. It doesn’t matter what your business is, you have to think about, “Okay, I know I’m going to raise this much money, maybe nothing. And I know that whatever I have is going to get me to a certain point at which, hopefully, I’ll have a product.” And there’s a revenue ramp. And at some point, your revenue is going to go up and then you can afford to pay the bills.

Scott Burkett: [00:20:21] What a lot of young entrepreneurs tend to do – and I see this unfortunately more often than I want to admit – they just assumed that once they get that revenue ramp going that it’s just cruise control from there. And they just basically are printing money. And that never works. It never works. When’s the last time-

Michael Blake: [00:20:40] It’s not that easy to become a billionaire?

Scott Burkett: [00:20:42] No, it’s not.

Michael Blake: [00:20:42] Oh, shocks.

Scott Burkett: [00:20:43] It’s absolutely not, but think about your — My iPhone, I turn it on. Every day, there’s updates to my apps, right. The ones that don’t get updated are going to become deprecated over time. Users are going to abandon them, and this could be mobile, but it could also be on the web as well. It could be on the desktop as well. I mean Word Perfect went under. Remember Word Perfect?

Michael Blake: [00:21:02] Sure.

Scott Burkett: [00:21:02] Yeah, it was great. It was great. Well, Microsoft Office came along with its auto updates, and then everybody said, “Hey, this is great. They’re adding new features to this incrementally. It’s getting better. It’s improving.” Word Perfect went the way of the dinosaur and had a horrible interface. They never did anything to fix it. It’s an antiquated analogy, but, still, it’s one of the examples.

Michael Blake: [00:21:20] No, it’s true. Once the old lawyers died out, that-

Scott Burkett: [00:21:21] That’s right.

Michael Blake: [00:21:22] Because the lawyers were the last stronghold-

Scott Burkett: [00:21:24] And they loved it, that’s right.

Michael Blake: [00:21:25] … for Word Perfect. And once they died out and retired, the new generation grew up with Microsoft Office or, now, Google Docs.

Scott Burkett: [00:21:31] That’s right.

Michael Blake: [00:21:32] That’s what they’re using, right?

Scott Burkett: [00:21:32] Users are going to demand a couple of things. They’re going to demand that the bugs get fixed. And there’s always bugs in software. It’s written by humans. Right? So, we’re going to have those problems. Bugs get addressed in a timely fashion. The product evolves. As new opportunities and new technologies arrive in the marketplace, your product, if it’s applicable, has to be in a position to take advantage of those things and incorporate those into your application as well.

Scott Burkett: [00:22:00] I’m just thinking out loud here, but I just bought a device called the AirServer, which is a little embedded device that allows me to stream Chromecast, and AirPlay, and Miracast from a PC, a Mac, a Smartphone. Any sort of device, I can screen cast directly to my TV. Well, before I learned about this product, you had to have the right laptop. You had to have the right TV.

Michael Blake: [00:22:24] Apple with AirPlay.

Scott Burkett: [00:22:25] That’s right, that’s right.

Michael Blake: [00:22:25] Apple TV.

Scott Burkett: [00:22:26] Exactly, right. So, something better came along. And it’s one of those things that something better is always coming along in this day and age. I mean, my Twitter feed is full of it. Every day, it’s just 20 new things that are launching that didn’t exist yesterday. And some of those things are going to fall out by the wayside. It’s just law of averages, right? But the ones that make it, the ones that have long-lasting ability in the marketplace are the ones you have to take advantage of. And how do I integrate with it?

Scott Burkett: [00:22:51] It may not be applicable to everyone, but when certain things come along — Like single sign-on is another great example of that, right. Interfacing with single sign-on, does your app want to take advantage of that? You see apps now that lets you login with Google or Facebook, right? Easy. You just click the button and you’re done, right?

Michael Blake: [00:23:06] Thank God.

Scott Burkett: [00:23:07] It’s great.

Michael Blake: [00:23:07] Just typing all those things with my fingers on the phone, it’s a nightmare.

Scott Burkett: [00:23:11] And it takes you eight times to get your password right. Then, you locked yourself out.

Michael Blake: [00:23:14] Exactly.

Scott Burkett: [00:23:14] But it’s one of those things that — Just think about this, if your product was in the marketplace, and you didn’t have that capability, it’s a seemingly inane feature. Okay. It shouldn’t be a make or break decision, but I can guarantee you, people will say, “Why do I have to keep logging into this when I can just — Why can’t I just click on the Facebook button and authenticate me that way?”

Michael Blake: [00:23:32] Especially if it’s just a subscription to Reuters. I don’t care if somebody pirates that account.

Scott Burkett: [00:23:37] That’s right. That’s right. You don’t really care.

Michael Blake: [00:23:38] I’m not paying anything. I can’t post anything. It’s not a high-leverage discussion.

Scott Burkett: [00:23:43] Absolutely right. So, I think you have to — Getting back to the question, I think, as a founder, you’ve got a budget for the incremental advancement and evolution of your app, okay. Be it on the desktop, the web, mobile device, it doesn’t matter, you have to constantly be thinking, how is this going to get better? Because that’s what makes your business better at the end of the day anyway. How are you going to evolve as a business? Well, that involves dragging your product along, hopefully, right?

Michael Blake: [00:24:05] Yeah.

Scott Burkett: [00:24:06] So, there you go.

Michael Blake: [00:24:07] All right. So now, It’s the time in the program to go negative.

Scott Burkett: [00:24:11] Uh-oh.

Michael Blake: [00:24:11] And what I mean by going negative is I like to talk about times when people and customers or, not even customers, companies have built apps that have just failed.

Scott Burkett: [00:24:21] Okay, sure.

Michael Blake: [00:24:22] Why do apps fail? And what can we learn from that where maybe it’s just not a good decision on the part of that company to commission the app in the first place?

Scott Burkett: [00:24:33] Well, we’re speaking here, obviously, in the business context. If you’re writing it for yourself, and it fails that you don’t even use your own tool, then that’s your problem. That’s not a world problem. But there’s a couple of things that it comes down to. If a company’s generating or building an app, we’ll just use a mobile app in this particular case, and maybe it mirrors their web application, right? They’re not seeing the adoption rate, for instance, going up.

Scott Burkett: [00:24:58] Now, if you’re web app is successful, and your mobile app is not, that’s a different problem, okay. That tells you that the core product that you have is valuable, and people are using it on the web, but they’re not using your mobile app. Maybe the interface stinks, maybe the usability stinks, it’s not worth it, there could be bugs, things like that that need to be addressed.

Scott Burkett: [00:25:18] But it all comes down, at the end of the day, to outreach and marketing, getting your app on the mobile side, the same exposure that your web application is getting in that particular instance. And when we say a business context, that’s generally what we’re talking about. It’s Facebook with a website or a web application, and they’ve got a mobile component to it as well, that type of pattern. So, they’ve got to look hard in the mirror and ask themselves why it’s not working, why it’s not getting the adoption.

Michael Blake: [00:25:44] And that’s true on the internal side too, right?

Scott Burkett: [00:25:46] That’s right.

Michael Blake: [00:25:46] If you want your app for internal use, you got to make sure people know about it.

Scott Burkett: [00:25:49] That’s right.

Michael Blake: [00:25:50] There’s got to be an incentive for them to use it.

Scott Burkett: [00:25:51] A policy. Crate a a policy, right?

Michael Blake: [00:25:53] It could be a policy, It could be you remove whatever process there was before, so they’re forced to use it,

Scott Burkett: [00:25:59] Right.

Michael Blake: [00:25:59] But-

Scott Burkett: [00:26:00] The worst thing you could hear as a developer, as s a software engineer, is that people aren’t using your app. They’d rather use email. That’s like the worst thing.

Michael Blake: [00:26:08] Really?

Scott Burkett: [00:26:09] Yeah. It’s too clunky, it does this, it’s too slow, whatever. It’s just easier to send the guy an email. Okay. So, that’s what they do, right?

Michael Blake: [00:26:16] Right.

Scott Burkett: [00:26:16] And email is like — Everybody wants to kill — Everybody has been trying to kill email for 20 years.

Michael Blake: [00:26:22] They have. It’s died more often than Rasputin.

Scott Burkett: [00:26:24] Exactly. I know, right? He’s on his 12th life at this point, right? But the reality is when that’s your fallback, your fallback is, “It’s just easier to send an email,” yeah, you got some issues with your app that you need to sort out.

Michael Blake: [00:26:37] And that brings up — I’m not going to attribute the name. I don’t necessarily have permission, but I was at a conference-

Scott Burkett: [00:26:41] Oh, come on.

Michael Blake: [00:26:43] I was at a conference a couple months ago, and there’s a venture capitalist there. One thing that he said that I’ll never forget, it was a great advice, is that, “Already good will always beat might be better, or good enough will always beat might be better.”

Scott Burkett: [00:27:02] Is there a question in there, or do you want to-

Michael Blake: [00:27:03] No, I’m asking for a reaction. If it’s something you’ve got, like email is already good enough, something that has, now, a learning curve that has some risk to it, if it’s not clearly better, it’s just going to get dumped off on the side of the road. They’ll go back, like you said, the email.

Scott Burkett: [00:27:20] Well, I think any founder would agree that their business plan paints a perfect picture of how things could be better or should be better. No business owner is going to say, “Well, my business plan does a poor job of telling you how great this product is going to be.” They’d probably go too far in that regard, if anything.

Scott Burkett: [00:27:36] I think that’s applicable sometimes. I mean, if it ain’t broke, don’t fix it Kind of mantra, but there’s certainly been plenty of applications that have come along that have made getting tasks done, or achieving certain goals, accomplishing something, adding value in ways that were it was easier than before. Case in point, look at LinkedIn, right. Before LinkedIn, I either knew you or I didn’t. I either could call you on the phone or send you an e-mail because I had that information. And email contacts were closely guarded, like that was your rolodex, right?

Michael Blake: [00:28:12] Yeah.

Scott Burkett: [00:28:12] Like the little black book that we used to have in the ’80s with all the phone numbers written down on. It was the same thing, you guarded your contacts. The business development people made a killing because they would go from one company to the next, and they bring basically their book of business with them because they had all their contacts, right?

Michael Blake: [00:28:26] Yeah.

Scott Burkett: [00:28:27] Well, that’s gone now. By and large, it’s gone. Still relationship-driven and a lot of industries are, but if you think about LinkedIn, if I wanted to connect with someone to ask them a question, or invite them to come on to a panel, or speak at an event, or whatever my reason is for reaching out, I can probably get to them within a day. I can probably get my message in front of them pretty, pretty quickly, right?

Michael Blake: [00:28:49] Sure.

Scott Burkett: [00:28:50] So, before LinkedIn came along, that didn’t exist. That capability didn’t exist. Now, imagine yourself as an investor, and it’s hard now because LinkedIn is just part of the fabric now. Everyone uses it but think about maybe 15-20 years ago as an investor, and some guy, Reid Hoffman, comes to you in California and says, “I’ve got this great idea. We’re going to connect the world on the internet.” “What? Okay. It’s a big idea. I get it, but-”

Michael Blake: [00:29:16] No, you burn them for witchcraft.

Scott Burkett: [00:29:18] Exactly. It’s heresy. “What do you mean? These are my contacts. I’m not going to share them with other people,” and that kind of thing. Well, the world’s changed. So, I think there’s some applicability to what that investor told you, either way though.

Michael Blake: [00:29:29] Yeah. So, a lot of apps are now made offshore. I don’t know if your company uses offshore.

Scott Burkett: [00:29:35] No.

Michael Blake: [00:29:36] Not so relevant to the discussion. But if I go to a shop, and they say that they tend to use a lot of offshore labor, wherever it is, it could be India, it could be Ukraine, it could be Philippines, should I be concerned? Should that in my mind be a disqualifying feature in terms of selecting who my developer should be?

Scott Burkett: [00:30:00] I think, it’s going to come down to one key factor here and that’s money.

Michael Blake: [00:30:04] Okay.

Scott Burkett: [00:30:05] Okay. You can certainly find a country that will build your app, probably off of a bulleted list, like we cautioned about earlier, and you save some good money if you find the right company in the right country. But I will tell you a story not so awful long ago, there was a Japanese software company that had offshored, outsourced some of its development on its key product to China. Okay. Well, China, hopefully, the Chinese politico is not listening to this right now, and they’re going to hunt me down or something, but China doesn’t really have a great track record in not stealing things. I mean, China has-

Michael Blake: [00:30:42] Always since Marco Paul.

Scott Burkett: [00:30:43] That’s right, yes. China has a wee bit of a reputation for reverse engineering things and just outright lifting things.

Michael Blake: [00:30:51] Adopting them as their own.

Scott Burkett: [00:30:52] Adopting them as their own. Look at our new stealth fighter, right. Yeah, right, whatever. So, this Japanese company was so paranoid about China, these developers in China working on their product, they actually had five different Chinese offshore companies, and they gave each one of them a piece of it. They wouldn’t give the entire thing to one company. So, what does that tell you?

Michael Blake: [00:31:12] I think Apple does that, if I’m not mistaken.

Scott Burkett: [00:31:14] They could, they could.

Michael Blake: [00:31:14] They don’t let everybody have the whole formula.

Scott Burkett: [00:31:15] The keys to the kingdom, right?

Michael Blake: [00:31:17] Yeah.

Michael Blake: [00:31:17] And I’m not here to say that all offshore is bad. It’s not. I’ve had some successes with offshore development in the past, and I’ve had some that were not as successful. Ultimately, it came down to the ones that were successful were the ones that were fully engaged with the team, the larger team, the business team throughout the development process. They took the time to understand the drivers behind it, and where we’re we going, and best practices. And there was a liaison on the business team that ensured that the development team were using best practices and things of that nature, so not to paint you into a corner.

Scott Burkett: [00:31:52] So, I think, it goes without saying that you should probably go into it with eyes wide open, if you do it. But to be fair, I would approach it here in the United States as well the same way. I’d do it the same way. I wouldn’t necessarily give it to five different companies to work on like the Japanese company I mentioned did. But I would certainly — Over here, we’re protected by NDAs and other things, IP agreements, and things like that, and, of course, the US Code of Law, which helps a lot.

Michael Blake: [00:32:19] There is that, yeah.

Scott Burkett: [00:32:20] The minute you put it offshore — And I’m not an attorney by any stretch of the imagination. Though, I have given a free legal advice before.

Michael Blake: [00:32:27] Don’t let that stop you.

Scott Burkett: [00:32:28] That’s right. But I think you should probably consult maybe some fellow entrepreneurs that have had successes building things offshore, and maybe kind of learn from them, specifically, who they’re dealing with, and are they reputable. That referrals always going to go a long way.

Michael Blake: [00:32:44] So, a recurring theme we’re hearing here is that the business side of the business has to be very closely involved with the technology side. This is not just something you hand over a bunch of nerds-

Scott Burkett: [00:32:55] That’s right.

Michael Blake: [00:32:55] … and say, “Have us build something.” I mean, you’ll get something.

Scott Burkett: [00:32:57] You’ll get something.

Michael Blake: [00:32:58] It just won’t be what you want most likely.

Scott Burkett: [00:33:00] Or the technical would be off the chart.

Michael Blake: [00:33:02] All right. Well, we’re running out of time, unfortunately. We could talk about this and other things-

Scott Burkett: [00:33:06] That true.

Michael Blake: [00:33:06] … for a long time. So, any concluding comments, anything that I should have asked but didn’t, or something else that our listeners need to know about the app decision process whether to build that app?

Scott Burkett: [00:33:19] I haven’t even got to my belly dancing bit.

Michael Blake: [00:33:22] Probably for the video version of the podcast.

Scott Burkett: [00:33:24] Okay. I think when you decide you want to build something, I think you have to make a commitment to the project. It doesn’t matter if you’re a solo founder, a single founder, or you’re a small team, or you’re a company that’s looking to build an application. Again, it doesn’t matter if it’s a desktop, web, or mobile.

Scott Burkett: [00:33:41] I think you’ve got to apply those fundamental business practices to it, take those practices, and basically force feed the development team with those business drivers because if you don’t, like you said, you’re going to get something back, but it may or may not — it may do everything on the list functionally, but it may or may not solve the problem at hand. And, I think, aligning those things is a very key factor that people should go into it with knowing that, so.

Michael Blake: [00:34:07] Okay. Well, this has been great. I’m sure somebody listening to this this podcast will want to learn more. How do people find you?

Scott Burkett: [00:34:15] Unfortunately, I’m fairly easy to find on the web. So, you can just Google my name, Scott Burkett, I suppose, or just go to scottburkett.com, and all my links are there somewhere. I think so.

Michael Blake: [00:34:27] Yeah. you are not hard to find.

Scott Burkett: [00:34:28] I’m, unfortunately, not hard to find.

Michael Blake: [00:34:30] All right. Well, that’s going to wrap it up for today’s program. I’d like to thank Scott again so much for coming and sharing his expertise.

Scott Burkett: [00:34:36] Thanks for having me.

Michael Blake: [00:34:36] This has been great. I’ve learned a lot. And we’ll be exploring a new topic each week. So, please tune in so that when you are faced with your next business decision, you have a clear vision when you’re making it. Once again, this is Mike Blake. Our sponsor is Brady Ware & Company. And this has been the Decision Vision Podcast.

Decision Vision Episode 2: Should I Fire My Client? – An Interview with Jim DeBetta, DeBetta Enterprises

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Decision Vision
Decision Vision
Decision Vision Episode 2: Should I Fire My Client? - An Interview with Jim DeBetta, DeBetta Enterprises
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Jim DeBetta and Mike Blake

Should I Fire My Client?

Michael Blake, Director of Brady Ware & Company and Host of the Decision Vision podcast, interviews Jim DeBetta on how to recognize when a client might be a bad fit, why it’s best to part ways, and how to do it gracefully.

Jim DeBetta, DeBetta Enteprises

Jim DeBetta is the Founder and President of DeBetta Enterprises which specializes in coaching and consulting for inventors and consumer products start-up companies. DeBetta Enterprises also assists clients with product development and engineering of consumer products as well as sales and marketing representation to major retailers for our select clients. Recently, Jim was Vice President of Retail Distribution for TV Goods which is owned by Kevin Harrington from the ABC show Shark Tank. I headed up a team of retail specialists that called on the world’s most prestigious retailers and TV shopping networks including HSN and QVC.

Jim is the author of the top-selling book, The Business of Inventing, former Staff Writer for Inventors Digest, and has sold over 100 million dollars of products for product entrepreneurs and inventors alike. His podcast, Get Retail Ready, is a valuable resource for those just starting out or looking to scale their business.

DeBetta Enterprises has formed a solid network of product engineers, factory brokers, angel investment firms, licensing experts, and sales and marketing professionals among many other areas of expertise. The firm works with Fortune 500 companies, celebrities, and individual inventors alike. They specialize in finding factories to produce products, create pricing strategies, marketing and public relations, and selling products to major retailers such as Target, Wal-Mart, Best Buy, Costco, Bed Bath & Beyond, Michaels, Walgreens, HSN, Macy’s, Amazon, and many others.

Prior to forming DeBetta Enterprises, Jim led a successful start up company which produced sport optics such as binoculars and hand held magnifiers. Jim was President and COO as the company grew from insignificant revenue to nearly $50 million dollars in sales in under 8 years.

For more information on Jim DeBetta and DeBetta Enterprises, go to http://www.jimdebetta.com/.

Michael Blake, Brady Ware & Company

Michael Blake is Host of the Decision Vision podcast series and a Director of Brady Ware & Company. Mike specializes in the valuation of intellectual property-driven firms, such as software firms, aerospace firms and professional services firms, most frequently in the capacity as a transaction advisor, helping clients obtain great outcomes from complex transaction opportunities. Mike is also a specialist in the appraisal of intellectual properties as stand-alone assets, such as software, trade secrets, and patents.

He has been a full-time business appraiser for 13 years with public accounting firms, boutique business appraisal firms, and an owner of his own firm. Prior to that, he spent 8 years in venture capital and investment banking, including transactions in the U.S., Israel, Russia, Ukraine, and Belarus.

Brady Ware & Company

Brady Ware & Company is a regional full-service accounting and advisory firm which helps businesses and entrepreneurs make visions a reality. Brady Ware services clients nationally from its offices in Alpharetta, GA; Columbus and Dayton, OH; and Richmond, IN. The firm is growth minded, committed to the regions in which they operate, and most importantly, they make significant investments in their people and service offerings to meet the changing financial needs of those they are privileged to serve. The firm is dedicated to providing results that make a difference for its clients.

Decision Vision Podcast Series

Decision Vision is a podcast covering topics and issues facing small business owners and connecting them with solutions from leading experts. This series is presented by Brady Ware & Company. If you are a decision maker for a small business, we’d love to hear from you. Contact us at decisionvision@bradyware.com and make sure to listen to every Thursday to the Decision Vision podcast. Past episodes of Decision Vision can be found here. Decision Vision is produced and broadcast by Business RadioX®.

 

Visit Brady Ware & Company on social media:

LinkedIn: https://www.linkedin.com/company/brady-ware/

Facebook: https://www.facebook.com/bradywareCPAs/

Twitter: https://twitter.com/BradyWare

Instagram: https://www.instagram.com/bradywarecompany/

Show Transcript:

Intro: [00:00:02] Welcome to Decision Vision, a podcast series focusing on critical business decisions brought to you by Brady Ware & Company. Brady Ware is a regional, full-service accounting and advisory firm that helps businesses and entrepreneurs make visions a reality.

Michael Blake: [00:00:22] Welcome to Decision Vision, a podcast giving you, the listener, clear vision to make great decisions. In each episode, we’ll discuss the process of decision making on a different topic rather than making recommendations because everyone’s circumstances are different. We will talk to subject matter experts about how they would recommend thinking about that decision.

Michael Blake: [00:00:41] My name is Mike Blake, and I am your host for today’s program. I’m a Director at Brady Ware & Company, a full-service accounting firm based in Dayton, Ohio, with offices in Dayton; Columbus, Ohio; Richmond, Indiana; and Alpharetta, Georgia, which is where we are recording today. Brady Ware is sponsoring this podcast. If you like this podcast, please subscribe on iTunes, and also please consider leaving a review of this podcast as well.

Michael Blake: [00:01:03] So, today, we’re going to talk about something that doesn’t get talked about a lot, which is firing a client. And firing a client when you’re in business, and particularly, if you have a sales role is something that just seems wrong. We work so hard to get clients. Clients are not easy to get. They’re not easy to keep. And so, we’re hardwired that every client is precious. And to, a large extent, I think that’s a healthy attitude to have.

Michael Blake: [00:01:33] When you’re not grateful for your clients, bad things happen, your business is not going to survive long. But there is a point where enough is enough. The customer isn’t always right. In fact, sometimes the customer is not the right fit, or they’re just a raving lunatic, or somewhere in between. But the thing about that process is important. If you fire the wrong client, you’ve passed up revenue for no good reason. If you fire the client badly, then your reputation is going to suffer. But if you’ve been in any business long enough, firing a client or firing customer is a fact of life.

Michael Blake: [00:02:09] So, we’re going to talk about that today with Jim DeBetta. Jim is the Founder and President of DeBetta Enterprises, which specializes in coaching and consulting for inventors and consumer products startup companies. His firm also assists clients with product development and engineering of consumer products, as well as sales and marketing representation to major retailers for their select clients.

Michael Blake: [00:02:31] Recently, he was Vice President of Retail Distribution for TV Goods, which is owned by Kevin Harrington from the ABC show, Shark Tank. Jim headed up a team of retail specialists that called on the world’s most prestigious retailers and TV shopping networks, including HSN and QVC.

Michael Blake: [00:02:48] Jim is the author of the top selling book The Business of Inventing, aformer staff writer for Inventors Digest and have sold over $100 million of products for product entrepreneurs and inventors alike. Jim’s podcast, Get Retail Ready, is a valuable resource for those just starting out or looking to scale their business.

Michael Blake: [00:03:07] His firm has formed a solid network of product engineers, factory brokers, Angel investment firms, licensing experts, and sales and marketing professionals among many other areas of expertise. They work with Fortune 500 companies, celebrities, and individual inventors alike. Jim and his team specializes in finding factories to produce products, create pricing strategies, marketing and public relations, and selling products to major retailers such as Target, Walmart, Best Buy, Costco, Bed Bath and Beyond, Michaels, Walgreens, HSN, Macy’s, Amazon, and many others.

Michael Blake: [00:03:39] Prior to forming the DeBetta Enterprises, Jim led a successful startup company that produced support optics, such as binoculars and hand-held magnifier. He was President and Chief Operating Officer and led the company from insignificant revenue to nearly $50 million in sales in under eight years. We welcome Jim DeBetta to the program. Jim, thanks for showing up.

Jim DeBetta: [00:03:59] Hey, thanks Mike. Good to see you again.

Michael Blake: [00:04:01] So, it’s interesting. When I put this topic out there. I really put it out on social media. I’d like somebody to come on and talk about firing clients. And sort of you rose your hand and said that, “I really like to come on and talk about that.” What motivated you to do that? Why is that a subject that is close to your heart?

Jim DeBetta: [00:04:23] Well, I mean, I think, in any business, but particularly my business, inventing is an emotional business. So, when people have a product, it’s not just, “Hey, I have a particular thing, I want to get out there.” But they get very tied to it because it’s like their baby. I mean, it’s something that they created out of a need or because there was a problem, and they couldn’t solve it, or couldn’t find a solution. So, they say, “Well, I got to do this on my own.” And then, they spend years developing it. And then, when they come to me, then I have to see if it’s a good fit for me. And when I saw that, I was like, “Oh, I got to jump in on this one.”

Michael Blake: [00:04:55] I have a little of experience to that myself. As you know, I used to run a nonprofit called StartupLounge, and I’m still at a monthly office hours. And sometimes, an entrepreneur shows up, and they want to run their idea by me. And you have to tell them, “Well, I’m sure your baby’s healthy but it ain’t all that good looking.”

Michael Blake: [00:05:15] And that is something that is not necessarily well-received from somebody that has internalized their problem or their business, I should say, the problem that they’re trying to solve, and they’ve had a lot of people cheer them along the way. So, that’s friends and family, “Go for it. That’s a great idea.” People, by the way, who lose nothing if the business fails, advisors like me that can make money if they start their business, start spending money on advisors. And there’s this feedback loop that just internalizes. And all of a sudden, you can get to a point where you think, “Wow, I’ve got the next iPhone.” It’s just that obvious. Do you encounter that as well?

Jim DeBetta: [00:05:51] Oh yeah. And friends and family are the worst because they they love you or-

Michael Blake: [00:05:55] They really are.

Jim DeBetta: [00:05:55] … they’re supposed to love you, but you’ll always have that obnoxious one that will say, “Oh, that’s crappy,” or “I wouldn’t do that ever.” But most of the time, they’re going to give you support, whether it’s the product’s good or not good in their mind. And that’s what they should do, in a way, but that’s why we don’t want them to say, “Well, my next door neighbor, or my parents, or my kids think this is great.” That’s a red flag to me. What matters is what everybody else in the world thinks objectively, so people can look at it and say, with no vested interest saying, “I would buy this,” or “I don’t like that.” And that’s an important thing.

Jim DeBetta: [00:06:27] But all of this comes down to, which I know we’re going to talk about is managing expectations when people start to work with me. And right off the bat, that’s how I determine if I should take on a client or even move on from a client when things start — when I get that feeling that things aren’t going right.

Michael Blake: [00:06:44] Okay. Well, we’ll come back to that. Let’s start off with, how do you work with a client?

Jim DeBetta: [00:06:50] Well, I mean, usually, people will come to me in all stages. Some people will come to me, and say, “Hey, Jim. I’ve got an idea for something.” And they haven’t really done anything. Maybe they’ve done a patent search, or they just went online, and wanted to see if the product was actually out there. And assuming that they haven’t found what it is that they’re creating, they will come to me, and I basically project manage them through the whole process. So, people will come to me at that stage. And then, people come to me that have multi-million dollar businesses, and they’re already selling some retailers, but they want to go further. They want to scale. They want to get into every retailer they can. They want to be a huge company.

Jim DeBetta: [00:07:24] So, they come to me at all phases and stages. And they come from everywhere, from social media, all over the world from referrals. And because the world’s so digital, people can find me easily, and I get a lot of lead flow, and people just reaching out because they see me out there online.

Michael Blake: [00:07:44] And you’re not hard to find. I mean, you’re a pretty prolific creator of content as well. And, I mean, you always want to give advice. I’m sure that helps. So, doing what you do, and I think I know the answer to this, but I don’t want to assume, what do you think is the hardest part about working with a client in your space? What’s the hardest hurdle you had to get over, the most common challenge?

Jim DeBetta: [00:08:05] It’s that emotional part that they all believe that their product is going to be the next billion-dollar idea. And most aren’t going to be million-dollar ideas. And I always say to people, “It’s okay to be a thousander,” because no inventor that I know invents for a living. They have a day job or a night job. And so, they have a living. They live a normal life, and this is something they do on the side. They do it at their lunch break, on the weekends, at 10:00, 11:00, 12:00 at night. So, for them, it’s a part-time thing, if that makes sense.

Michael Blake: [00:08:37] That’s really interesting. You’re right. I mean, there really is, now, kind of modern day Thomas Edison, right?

Jim DeBetta: [00:08:43] Yeah.

Michael Blake: [00:08:44] Maybe the late Steve Jobs. Maybe he was kind of that, and he had like a whole huge corporation to sort of back that. And maybe the late, I’m sure you’re aware of him. The late Ron Popeil.

Jim DeBetta: [00:08:55] It’s huge.

Michael Blake: [00:08:55] That kind of that guy, right?

Jim DeBetta: [00:08:56] Yeah, absolutely.

Michael Blake: [00:08:57] By the way. I have one of those those Showtime Rotisserie.

Jim DeBetta: [00:08:59] Doesn’t everyone? I think.

Michael Blake: [00:08:59] I got one of those things for Christmas. The damn thing actually works.

Jim DeBetta: [00:09:03] They are good.

Michael Blake: [00:09:04] I can’t believe it. We don’t make a turkey without it now.

Jim DeBetta: [00:09:06] Yeah.

Michael Blake: [00:09:06] I got that thing for Christmas, and I thought, “For sure, this is going in our attic. It’s never coming out again.” And now, I was going to fry a turkey last year, and my son, “Oh, you’re going to fry a turkey?”

Jim DeBetta: [00:09:16] Yes.

Michael Blake: [00:09:17] “I really like the rotisserie one.” So, Ron, if you’re listening buddy, you’ve got one satisfied costumer down here.

Jim DeBetta: [00:09:21] That’s right.

Michael Blake: [00:09:21] But you’re right. Most people do this as a side gig. I hadn’t thought of that. That’s a really interesting.

Jim DeBetta: [00:09:27] Yeah. And they have to because when you start, like you start any business, you’re writing checks, but there’s no money coming in. So, they need to fund the business through whatever it is that they do for a living. Very few people will call me with an inheritance on their hands, or they’ll just max out their cards, but that’s another thing too. I have to kind of temper that. If somebody says to me, “Jim, I’m going to empty my 401(k),” I push back. I don’t want it. I don’t want to feel — because I know it’s a risky business, I don’t want to be the one that takes the money there and leads them down that path. They fail, and now they really have nothing.

Michael Blake: [00:09:58] And that puts a lot of pressure on you.

Jim DeBetta: [00:10:00] Sure.

Michael Blake: [00:10:00] That, for me, would create performance anxiety.

Jim DeBetta: [00:10:05] Right.

Michael Blake: [00:10:05] When somebody comes to me and says, “I’ve just emptied out my 401(k). I’ve leveraged the 529. My wife doesn’t know any of this.”

Jim DeBetta: [00:10:12] I have that too. It’s like, “Don’t tell my wife. Don’t tell my husband.” I’m like, I don’t really want to start off this way. I always say, “Don’t tell me. If it’s something you don’t think I want to hear, don’t even bring it up.”

Michael Blake: [00:10:21] That’s right.

Jim DeBetta: [00:10:23] It’s a scary thing out with people. Because they get so emotionally attached, they will do just about anything to fund it or come up with money for it. And that’s a scary notion sometimes.

Michael Blake: [00:10:33] So, it sounds like part of your job, and I find this in mine too, sometimes, you have to be an amateur therapist.

Jim DeBetta: [00:10:40] You do. I mean, and again, a lot of it comes down to just calming people down. They call me up, “Jim, I’ve got this thing. It’s awesome. I’m so excited. And I’ve been doing this, and I’ve been doing that.” And you have to get them on the phone. You have to say, “All right, look, it’s a business, it’s like any other business. It’s risky.” And I have to almost scare them away because if I don’t let them know the realities of it and that they can fail.

Jim DeBetta: [00:11:01] And some people say, “Well, why do you do that? Why do you scare people away? Why aren’t you being more positive?” I’m like, “Look, I’d rather air on the side of, ‘Okay, I prevented somebody from doing something basically stupid,’ and encourage their misbelief of something than-” You know what I mean? That’s important to me. And I’ve been doing this for you 20 plus years. I think I have a good handle, a good intuition when it comes to how people are with me. And within 30 seconds, I know how they’re going to be.

Michael Blake: [00:11:30] And I think that’s a sign of a strong professional is you know there are some times you shouldn’t take your client on because you could take their money today. In fact, in your case, they’re probably saying, “Shut up and take my money. I got to get this thing on Walmart and Target.” And you make it hard. And I suspect, because I run into this also, when people think that they want their business appraised, I don’t want them at the end of a 30-day, 60-day, one-year process thinking that I had told them that I laid out the yellow brick road for them, and then it didn’t end that way. That’s bad all the way around, right?

Jim DeBetta: [00:12:10] Yeah. And you’ll hear me say this a few times, it’s managing expectations for people. You have to do it for them. They’re not going to do it themselves. They’re excited, right? They’ve got an idea. I mean, they see other people, they watch Shark Tank, they see all the activity out there, and they believe that their product is the next one or it’s better. And they get fooled by that. And so, it is. I have to. I don’t want to.

Jim DeBetta: [00:12:33] I mean, who wants to turn away business, but I have to tell some people, “This is not right. You shouldn’t be doing this,” or “You should slow down,” or there are people that want to hire me, they see the offerings I have in terms of packages and things that I offer. “I want the best. I want-” I’m like “No, no. You’re not ready for that.” “What do you mean I’m not?” They get — I’m like, “Look I could take your money. I’ll send you an invoice. You’ll pay me in five seconds.”.

Jim DeBetta: [00:12:54] But that’s not the right thing to do. The right thing is to get them in a better position to have a better chance at success. And the way to do that is to calm them down, right, and say, “Here’s what’s likely to happen. Here’s the path. It’s not going to take three weeks. It’s going to take three months or six months.” And then, they go back and sleep on it. And then, usually, most people will come back to reality and say, “Okay, I got it. I talked it over with whoever. I appreciate it. I feel good about it. Okay, how do we move forward?”

Michael Blake: [00:13:23] So, do you remember the first time or one of the first times you ever had to fire a client? And if so — Or maybe talk about any time you had to fire a client. What prompted that? And how did somebody get through your gate process, your gate keeping?

Jim DeBetta: [00:13:38] Well, some people, you just can’t get through to. I mean, if somebody is really that excited, you’re not going to stop them. If they don’t go to me, they’re going to find somebody else to do it for them, or they’ll do it themselves, which is scary because they really don’t know what they’re doing. I would always say, “You’re sick, you go to a doctor,” that kind of thing. You can’t be a product designer, a package expert, a factory, an attorney, and all those things. You can’t be, right?

Jim DeBetta: [00:14:01] So, those people will go ahead and try to do it anyway. Who knows who listens to this. Of course, there’ll be no names mentioned, but I have fired a lot of people. And the first time I fired somebody, it was hard for me because it was many years ago. And, again, you’re earlier in your business, and you need all the business you can get, but you still want to have integrity and do the right thing. But you try to justify it in your own mind like, “Should I fire them or can I just — They’ll be OK you know and I’ll still work with them.”

Jim DeBetta: [00:14:29] But I had a woman who, right off the bat, was, “This is the billion idea. And then, it’s going to be great.” You get excited by their enthusiasm. But then, literally, the next day, I’d be getting emails saying, “What’s getting done here? Are you doing this? Are you doing that? How can we ever reach out to one of the chain stores yet?” And I’m like, “We just started yesterday.” And even though I said, “It’s going to take time, this is the process,” I  couldn’t calm this person down, ever. And it drove me crazy.

Jim DeBetta: [00:14:58] Then, they get mad because you’re not performing even though you’ve had in writing saying, “This is what it’s going to take.” And you have a phone call, “This is what it’s going to take.” It’s almost like I didn’t say anything. And then, they are like almost going after, and I’m like, “I can’t.” I mean, forget the money. It’s like, “I can’t do this. It’s too stressful. Here’s somebody else you can go talk to.”

Michael Blake: [00:15:20] It’s the kind of client where every time they contact you, it’s never just talk about what a great job you’re doing.

Jim DeBetta: [00:15:26] But you cringe, you see that e-mail in your inbox, or the phone ringing, and you’re like, I don’t want to answer the phone when you call or be happy to get your email. I shouldn’t be working with you.” Over time, you evolve. Right now, I’m really picky. I want to work with people that are fun to work with, that I enjoy talking to. That’s like my biggest criteria now. I mean, a product is product, right? I mean, they’re made of something, they made in a factory, we sell it to the same stores, they’re widgets to me.

Jim DeBetta: [00:15:53] I mean, I get excited and passionate about the products when I go to the retailers, but, at the end of the day, a product is a product. I have to enjoy working with you because if I cringe or even shudder at the thought of hearing from you, who wants to do that? I don’t want to do that, enough for any amount of money really.

Michael Blake: [00:16:10] Yeah. Well-

Jim DeBetta: [00:16:11] Maybe, maybe.

Michael Blake: [00:16:15] So, this is actually segueing nicely into the kind of the next question I want to ask, which is, what are some of those warning signs that this relationship is a mistake and we got to think about ending it?

Jim DeBetta: [00:16:26] Yeah. On their end, they’re overenthusiastic to the point where they’re not being realistic. That’s the number one criteria to me. Number two is somebody that will tell me that they’re on their last dime doing this. And I have people that I start with. So, I’ve hired them, or they’ve hired me rather. And then, I have to fire them because they reveal something like that to me, something personal or something financial, and I’m like, “Look, it’s like building a house. You got to have the money to build the house. Once the architect lays out the plans, what are you going to build? The frame? And then, go out of money,” and I get that kind of scenario.

Jim DeBetta: [00:17:03] Those people, I have to try to help them for free, so to speak, and transition them off of what they’re doing or onto another, like maybe go to licensing versus doing it themselves, and introduce them to those people. But I got to let those people go to because that kind of thing where they reveal something personal to me, I know it’s going to be — Then, yes. There’s that performance pressure. If this thing isn’t a home run, maybe they won’t get mad at me, but I’m going to feel bad and it’s going to be devastating for them.

Michael Blake: [00:17:33] Right. I mean, if you have any sense of integrity, you do feel responsibility for the client outcomes. And yeah, I’m sure some people just want to bring inventions to the market because that’s just a vision they have. But people want to make money. They’re putting a significant financial investment. I get that too. And particularly in the startup space, someone will call me up and say, “I want to get my business appraised because I’m going to raise money.”

Michael Blake: [00:17:55] And one of the first questions I ask them is, “Well, you’re talking to this one investor. If they no, what happens?” “Well, I don’t know. I’m not sure.” “Well, do you have enough money to survive?” “Well, no. I need this investment.” I said, “Well, then my valuation doesn’t matter.” Right?

Jim DeBetta: [00:18:10] Right.

Michael Blake: [00:18:10] If that person walks away, you’re out of business. I’ve taken a check, but I haven’t helped, I really haven’t helped anybody in that process, right?

Jim DeBetta: [00:18:19] Right.

Michael Blake: [00:18:19] And that invention, inventor story sounds very similar to that.

Jim DeBetta: [00:18:24] I think that’s a big part of it. I think because those people that come to us, you hope that they’re coming to us for a reason because they don’t know something, we know something, they need our help. And that’s another reason that I’ve let people go is because people will hire me, and then they tell me everything that I’m supposed to be doing. Even though they have no knowledge, they say, “Jim shouldn’t you do this? And this is how this should be done. No, when you talk to a buyer this is what you should be saying.” I’m like-

Michael Blake: [00:18:48] Oh, that drives me crazy.

Jim DeBetta: [00:18:49] And look, I’m open here. Look, I’m willing to learn something new. I don’t care where it comes from. I mean, my kids can tell me something, and if I could pick up something, and it helps me to do my job better for them, great. I’m not about, “You hire me, so I tell you everything. You have no say. You have no ability to help.” I always tell people right off the bat, “This is a two-way street. We have to communicate. I need things from you. You need things for me. And if there’s differences, we talk them out. But primarily, you’ve hired me. You’re paying me to do something that you can’t do or don’t know how to do. So, when push comes to shove, you have to make a choice,go with my words because I’ve done this ten thousand times.”

Michael Blake: [00:19:29] Why hire me if you’re not you’re not going to listen to my advice?

Jim DeBetta: [00:19:31] Right. And I’ve let a couple people go in the middle of things because they were so overbearing with them hiring me, but then all of a sudden, they where the expert and I was the client. It shouldn’t be that way. Again, it should be collaborative, but it shouldn’t be where if I pay somebody to come do something for me, I expect that they’re going to be competent, and they’re going to do their job. And I say, “Hey, what about that?” or “Can you maybe look at this?” That’s your right. You’re paying money, but if you’re going to overwhelm, overtake the whole process, then you know what, go do it yourself or find somebody else. And it’s frustrating sometimes.

Michael Blake: [00:20:01] I think that gets a fundamental lack of trust, and not in your trustworthiness, but the client’s inability to trust you. I actually fired a client earlier, it’s now 2019, middle of last year because we did an appraisal for them, sent them a draft. And the client, then, took our drafts, started showing it, and said, “I showed it to my friend who’s an investment banker,” and he says, “Your numbers are wrong.” And I listened very carefully to investment bankers because they’re out in the marketplace. So, many of them are very good experts.

Michael Blake: [00:20:34] So, well. “What did you show them?” “First of all, I showed you the work product.” “So, okay, our engagement, I said, you weren’t supposed to do that, but, okay. What information did you give them besides the work product?” “Nothing, we had a 10-minute conversation.” “All right. So, our teams put in 25 hours on this, but you’re going to show this to one person with a 10-minute conversation, you’re going to decide that their opinion is more valid than mine. I think that you should retain them or somebody else. Let’s settle up and split because if that’s the level of trust you have in this process, I can’t think of what’s going to make it end well.”

Jim DeBetta: [00:21:16] Yeah. And we fight that in my business too. Somebody will immediately go somewhere else, or they’ll try to reach the retail buyers themselves because I haven’t gotten in touch with them quick enough. There’s always going to be those types of people. So, all you can do really is just try to set the table from the beginning, “Here’s how I work. This is what I expect of you. This is what you should expect of me.” We talk about it. We write it out.

Jim DeBetta: [00:21:37] Beyond that, you lose control a little bit. But, again, you can usually — I know I can get a great sense of how somebody is immediately. I could just tell. I could tell their tone. It also depends on how much experience they have. If they’ve been trying to do this on their own, and they’ve failed repeatedly, they’re coming to me at a desperation. They really will then say, “Okay. Jim, you do what you got to do,” because they’re at their end. They don’t have other option. They’ve probably tried other avenues, or tried calling other people, and they aren’t getting satisfaction. So now, I’m the end game for them.

Jim DeBetta: [00:22:08] Those people are a little easier to deal with because they let me do my thing, and they listen better. The ones that, like I said, get very emotional or very connected to their own thought about, “This is not going to fail no matter what,” I’m like, “Well, you need to have a great mindset, this is not going to be an easy road, but I’m telling you right now, the chances of you succeeding, they’re small. And I just want to let you know that right off the bat.” But we get that people will go around you, or talk to a name, or somebody who’s not from the business at all even, and say, “They said that this packaging doesn’t look good or the pricing is wrong.” And I’m like, “Are they buying it? Are they in this business?” I get a lot of that. And it’s easy usually to kind of squash it. But, once in a while, you get somebody who really push the envelope on it.

Michael Blake: [00:22:54] So, how do you tell whether or not there’s a systematically bad fit versus it’s just a bad day, bad week ,bad month for you or the client?

Jim DeBetta: [00:23:03] Yeah. I have people that they are a good fit, and then they’ll have that breakdown because they’re right, they’re spending money, and nothing’s happening yet. They’re not selling. It’s much easier to write a check to get prototypes done or patents done, but to sell a retail, it’s such a long-selling cycle. So, they won’t see money for six months, a year, and it’s hard for them. And so, sometimes people will — It seems like everything is going great, and I get that email that I’m happy to get or that call, but it’s a total flip. They’re like, “Jim, I don’t know what’s going on, and I feel this way, I feel that way.” That’s a bad day. They just need you to encourage them. “Look, this is the business. This is what we talked about. It’s going to be all right. I understand.”

Jim DeBetta: [00:23:46] Nine out of 10 times, they’re good. You talk to them right through, But other times, you get people who are completely the opposite. And, again, I got a pretty good feel, I rarely get it wrong these days. I used to not always get it right, but, now, I’m a much better because I’m even more patient with waiting for people. I don’t look to sign somebody up so quickly anymore. Now, I let people sleep on it, and I sleep on it.

Jim DeBetta: [00:24:12] I had been talking to a woman just yesterday, actually yesterday morning. Long story short, I talked to her a couple of weeks ago. She sent me samples, I looked at them, I thought they were really good. And I took a few days to call her back. I wanted to feel like this was a good fit for me as well. And we got on the phone, and we talked it out, and she understands. And I said, “Well if you’re good,” and then, I followed up with an email and said, “Let me know what you think.” And so, I’m slower in my process, but I think that allows me to have less error in what kind of client I have and how they’re going to be.

Michael Blake: [00:24:46] I tell people, there’s not that much benefit to being older. You get gray hair, and in my case you get two arthritic ankles, but the positive side of that is wisdom.” And realizing that the value of a deep breath, the value of sleeping on things, the value that you don’t have to respond to everything right in the moment because that leads to a bad decision more often than not.

Jim DeBetta: [00:25:15] And I’m not that way. I’m more of the impulsive type. It’s hard for me to sit back and wait. I’m not afraid to lose anything. There’s always businesses. There will always be. As long as there are inventors, I’ll be in business. I never worry about that anymore. But it’s still my nature to want to respond quickly, but I have to actually stop myself and find something else to do. Otherwise, I will be reactive too quickly.

Michael Blake: [00:25:40] Yeah. I mean, you’d love to resolve it, get it off your plate, and not have to worry about it. But again, that’s just growth. That’s the benefit we get for the gray hair. Do you have a preferred kind of method for firing a client? In other words, there’s a passive way to firing a client, which is basically raise your rates, and then they don’t want to work with you anymore. Or there’s that, “It’s not me, it’s you” conversation, even though in your mind you’re saying, “It’s not me, it’s you.” Do you have a preferred method or have you use different techniques based on a different scenario?

Jim DeBetta: [00:26:17] Yeah. When you had written that out about the raise your prices sort of thing, I think I do that naturally only because I know the type of client I want, and I know that will do well, and I know that client has to be financially capable of doing things. I know that there are people who will — I don’t do the free stuff or the 1999 to get them in the door. I don’t like doing those types of things because I know that that client will pay a few dollars to get information, but they probably won’t want to pay a lot more to have the real work done.

Jim DeBetta: [00:26:47] I don’t know if I have a specific way I go about that. I think I just feel it as I go and as things develop. But my criteria is, just like I said, it’s just more instinct than it is anything these days. I just get a sense. I get them on the phone. I won’t do it via email. If I have a problem with somebody, I am a big emailer. I prefer to actually email and text people than to talk all day long. But if I have a problem with somebody, I will call them, and I will say that it’s them. I won’t blame me because I know that I do the same thing for you, that I’ll do for you, that I do for everybody, if that makes sense.

Jim DeBetta: [00:27:24] So, I will let them know that. It’s not tolerable. I can’t work on the — You hired me to help you, and you’re telling me what to do, or you’re unrealistic. And I know this is going to lead to bad things. So, I tell them that either they need to change, and some people will, or they need to understand that we can’t work together anymore. And then I’ll finish up and help them transition, but that’s usually what I would do.

Michael Blake: [00:27:48] Well, that’s good. So, you don’t break up by email, or text, or anything like that.

Jim DeBetta: [00:27:52] No. Not like that.

Michael Blake: [00:27:53] Do it like a professional, right?

Jim DeBetta: [00:27:54] That’s a tough one to do.

Michael Blake: [00:27:55] But the object lesson here is if I ever see you calling, that means you’re going to break up with me.

Jim DeBetta: [00:28:00] That sounds great. I would tell people, “If I call you, and I don’t outbound call a lot of my clients a lot, it’s either something is going on bad, or something is really good, like we get a big purchase order from a retailer, but you’ll like it enough. That’s a fun phone call to get. But if I call you otherwise, something is up. Otherwise, we’re going to email and correspond that way.”

Michael Blake: [00:28:18] Okay. Is there a client you can remember that you should have fired, but didn’t?

Jim DeBetta: [00:28:27] There’s probably a bunch that I probably should have. And again, those with were the early days when I tried to hang on, not necessarily I really needed to, but I felt like I could. I tried to — Like I said, with age comes wisdom. Now I know that I don’t want to wake up tomorrow feeling stressed. I don’t want to go through a month of stress before I let somebody go. If I feel the tension, and I know it because it’s not me, even if I’m wrong, I’m still going to let them go.

Michael Blake: [00:28:57] I found that I cannot think of a time where I’ve ultimately regretted either firing a client or turning one away, but I can tell you for sure the clients that I’ve regretted taking on are not fired.

Jim DeBetta: [00:29:13] Yeah, I agree. I think you remember, if you will, the mistakes more than.

Michael Blake: [00:29:16] That’s right.

Jim DeBetta: [00:29:17] Because we don’t know what would have happened with that the other way. But we know when we keep ones that are difficult, you still try to see it through though, right? I always try to ignore how they get, and I just say, “Just let me do my thing.” If I just keep going on, and they don’t like what I’m doing, they’re going to fire me. So, I almost put it on them. I’m like, “I’m going to keep doing what I’m doing.”

Michael Blake: [00:29:37] Well, you think they’ll fire you, right? But some don’t.

Jim DeBetta: [00:29:39] Yeah. No, you’re right. But then it winds up working out because, then, they see what they hired me for, right. At the end of the day, at the end of the road, look, it worked, or you got your product developed, or hey, you’re selling it on whatever website. Then, they’re happy and appreciative later on.

Michael Blake: [00:29:56] So, that’s interesting. So, I think that’s sort of a lesson. It seems to me like you know pretty early on if it’s a bad fit. It doesn’t sort of sneak up on you necessarily. It’s not like the boiling fraud for example. It sounds like you know pretty early on.

Jim DeBetta: [00:30:09] Yes. Almost every time, I know right away.

Michael Blake: [00:30:12] Really?

Jim DeBetta: [00:30:12] Very quickly.

Michael Blake: [00:30:13] That’s awesome.

Jim DeBetta: [00:30:13] Because I can, again. And I think that a lot of it, it’s just instinct and experience. I’ve done it a million times. There’s only certain ways people can be. It’s not like there’s a thousand different ways people are going to act. It’s just really a handful when I see those that are red flags to me, I know. And like I said, again, even before there is a higher fire, I know how people are going to be. If I can’t manage their expectations immediately, I know that I shouldn’t even begin working with them. Never mind having to fire them, so to speak.

Michael Blake: [00:30:41] Because it’s not going to get better.

Jim DeBetta: [00:30:42] It’s not. I know it’s not going to be.

Michael Blake: [00:30:44] The more ingrained you get, you’re more entrenched, right?

Jim DeBetta: [00:30:46] Yeah. And I don’t need that.  I don’t want that.

Michael Blake: [00:30:48] Okay. Has a client ever talked you out of firing them? You’re all set, you’re going to fire them, but then they said, “No, I really want to stick it. Please, Jim. You’re so great. I promise I’ll be better.”

Jim DeBetta: [00:31:03] I don’t know if I’ve had that. I think it’s either it’s cut or dry. I’ve had a few people where I’ve told them they need to calm down. It wasn’t like you’re getting fired. I guess it’s like the warning, right?

Michael Blake: [00:31:15] Yeah.

Jim DeBetta: [00:31:16] You need to chill out, you need to do this, you need to do that, or you’re not communicating well, or you’re going and trying to email a buyer when I told you do not do that. People will go off the script, so to speak. And I’ll warn them. And then, those people will say, “Okay. I’m sorry. I didn’t realize it,” even though they probably knew what they were doing. And then most of the time, they’re good. They turn around because I try to be friendly. I’m not like, get on, I’m trying to be rough with people when I work with them. I’m not trying to dictate. I’m trying to do my job.

Michael Blake: [00:31:43] People hurt themselves when they do that.

Jim DeBetta: [00:31:44] Right. So, it’s kind of like a parent to a kid. Look, you’re doing this wrong, and then you hug him later and it’s fine, and usually that works out.

Michael Blake: [00:31:53] Okay. Any concluding comments? Anything we haven’t covered that you think we should before we wrap up here?

Jim DeBetta: [00:31:59] Well, I think we’ve hit on all the big things. I think you have to — I think, for me, and I think what other people can benefit from is even though you want that client, even though it may be important to you, whether it’s financially or just for your own self to feel like you can obtain clients. I think you have to go with your gut. I think you have to realize that if something just doesn’t feel right, and you feel like it’s overwhelming, or there’s going to be undue pressure, or you can’t manage those expectations, just don’t even do it. Don’t even start. I know it’s easy to say because I’ve been doing this, and I have an established business, but if I could look back at my younger self and do certain things over, I would probably have been a little more patient with the hire, so I didn’t have to worry about the fire.

Michael Blake: [00:32:43] Because hiring the wrong client can actually do more harm than good, right?

Jim DeBetta: [00:32:48] Yeah. And, also, if you get people who are a little off the wall with the way they are, they’re very aggressive, or they’re hotheaded. Then, today, with social media, they could just go online and be reckless in what they say about you.

Michael Blake: [00:33:01] That’s true.

Jim DeBetta: [00:33:01] I’ve been fortunate, I’ve never had anybody do that. Although I’ve not had many people that have gotten upset like that. But, still, it’s so easy. I mean, someone could just comment on this podcast blah, blah, blah. People do whatever they like.

Michael Blake: [00:33:13] You can walk out of here and accuse me of a federal crime.

Jim DeBetta: [00:33:15] Before I even get to my car, right?

Michael Blake: [00:33:17] Absolutely.

Jim DeBetta: [00:33:17] And that’s scary. So, you have to also be cognizant of that, that if you feel like that person is going to be that person. I have people call me up and they say, “Jim,” and they tell me how confrontational they are with other things in their life. And I’m like, “Yikes. Is that the kind of person I want to even work with? If things go south, maybe they’re going to-” If they’re telling me what they’re doing to other people, maybe they’re going to do that to me.

Michael Blake: [00:33:38] Sorry, I was late, I got a ticket for road rage on my first meeting.

Jim DeBetta: [00:33:41] Right, yeah.

Michael Blake: [00:33:41] Not a good sign.

Jim DeBetta: [00:33:43] Well, I’ll call you back tomorrow. We’ll see if we could work together.

Michael Blake: [00:33:46] So, well this has been great. I want to make sure people know how to find you. So, if they want to learn more about this or what you would actually do for a living, how do they find you?

Jim DeBetta: [00:33:55] Well, can you hide anymore these days? I mean, if-

Michael Blake: [00:33:57] I’ve tried, man.

Jim DeBetta: [00:33:59] You can’t. No, not today. Yeah, we push too much out there to be — I would say social media is the best way. I have one of the largest invention groups on Facebook in the world. It’s called We Know Inventing. People could go on there. But if they just go on and Google Jim DeBetta, it will lead them to my websites, which one is my namesake jimdebetta.com. I’m on Facebook, I’m on Instagram, I’m on LinkedIn very heavily, I’m on Twitter. They’ll find me in two seconds. They’ll be able to reach me. And I answer everything. It’s hard to because I get a couple hundred emails a week or messages. And I believe in that. I’ll sit up, and I’ll, at least, say, “Got it. And thanks for reaching out.” So, I respond to people. And I think it’s important to in business to be busy as you get to, at least, acknowledge somebody coming along.

Michael Blake: [00:34:47] Yeah. Well, very good. Well, that’s going to wrap it up for today’s program. I’d like to thank Jim DeBetta so much for joining us and sharing his expertise with us. We’ll be exploring a new topic each week. So, please tune in, so that when you’re faced with your next business decision, you have clear vision when you’re making it. Once again, this is Mike Blake. Our sponsor is Brady Ware & company. And this has been the Decision Vision Podcast.

Decision Vision Episode 1: Should I Get a Patent? – An Interview with Jackie Hutter, The Hutter Group

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Decision Vision
Decision Vision
Decision Vision Episode 1: Should I Get a Patent? - An Interview with Jackie Hutter, The Hutter Group
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Jackie Hutter and Michael Blake

 

Should I Get a Patent?

Michael Blake, Director of Brady Ware & Company and Host of the Decision Vision podcast, interviews Jackie Hutter on when it may be best to forego the patent process, the steps in a patent process and the cost, how an entrepreneur should select and manage their patent attorney, and other key topics related to patents.

Jackie Hutter, The Hutter Group

The Hutter Group enables start ups and small companies to generate and deploy intellectual property that can enhance revenue and exit goals. While working with innovators to obtain meaningful patent protection that “makes it cheaper to go through you than around you,” we work with our clients to identify IP Strategies that are meaningful to their businesses, with the objective of creating IP that is aligned with real value.

Jackie Hutter has been recognized for each of the last 8 years for her innovative insights in creating value from IP Strategy with the peer-awarded Top Global IP Strategist by Intellectual Asset Magazine. Ms. Hutter’s IP Strategy clients have been varied, and include a Fortune 500 consumer hardware company, a large alternative energy company, several funded medical device ventures and dozens of startup companies with diverse technology offerings. From 2011-2015, Ms. Hutter also served as a the CEO of a startup battery-related company, which has provided her with a unique vantage point among her experienced colleagues about what it means to work with counsel to generate the critical IP necessary to prevent competitors from “knocking off” the innovator’s technology. Her experience extends beyond the IP realm: she frequently handles contracts and related matters for her clients, especially those relevant to clients’ IP rights.

Michael Blake, Brady Ware & Company

Michael Blake is Host of the Decision Vision podcast series and a Director of Brady Ware & Company. Mike specializes in the valuation of intellectual property-driven firms, such as software firms, aerospace firms and professional services firms, most frequently in the capacity as a transaction advisor, helping clients obtain great outcomes from complex transaction opportunities. Mike is also a specialist in the appraisal of intellectual properties as stand-alone assets, such as software, trade secrets, and patents.

He has been a full-time business appraiser for 13 years with public accounting firms, boutique business appraisal firms, and an owner of his own firm. Prior to that, he spent 8 years in venture capital and investment banking, including transactions in the U.S., Israel, Russia, Ukraine, and Belarus.

Brady Ware & Company

Brady Ware & Company is a regional full-service accounting and advisory firm which helps businesses and entrepreneurs make visions a reality. Brady Ware services clients nationally from its offices in Alpharetta, GA; Columbus and Dayton, OH; and Richmond, IN. The firm is growth minded, committed to the regions in which they operate, and most importantly, they make significant investments in their people and service offerings to meet the changing financial needs of those they are privileged to serve. The firm is dedicated to providing results that make a difference for its clients.

Decision Vision Podcast Series

Decision Vision is a podcast covering topics and issues facing small business owners and connecting them with solutions from leading experts. This series is presented by Brady Ware & Company. If you are a decision maker for a small business, we’d love to hear from you. Contact us at decisionvision@bradyware.com and make sure to listen to every Thursday to the Decision Vision podcast. Past episodes of Decision Vision can be found here. Decision Vision is produced and broadcast by Business RadioX®.

Visit Brady Ware & Company on social media:

LinkedIn: https://www.linkedin.com/company/brady-ware/

Facebook: https://www.facebook.com/bradywareCPAs/

Twitter: https://twitter.com/BradyWare

Instagram: https://www.instagram.com/bradywarecompany/

Show Transcript:

Intro: [00:00:02] Welcome to Decision Vision, a podcast series focusing on critical business decisions brought to you by Brady Ware & Company. Brady Ware is a regional, full-service accounting and advisory firm that helps businesses and entrepreneurs make visions a reality.

Michael Blake: [00:00:23] Welcome to Decision Vision, a podcast giving you, the listener, clear vision to make great decisions. In each episode, we’ll be covering a key topic to discuss the process of decision making rather than making recommendations because everyone’s circumstances are different. We’ll talk to subject matter experts about how they would recommend thinking about that decision. And then, you can make that decision on your own.

Michael Blake: [00:00:44] My name is Mike Blake, and I’m your host for today’s program. I’m a Director at Brady Ware & Company, a full-service accounting firm based in Dayton, Ohio, with offices in Dayton, Columbus, Ohio, Richmond, Indiana, and Alpharetta, Georgia, which is where we are recording today. Brady Ware is also sponsoring this podcast. If you like this podcast, please subscribe on iTunes, and please consider leaving a review of the podcast as well.

Michael Blake: [00:01:07] So, today we’re going to be talking about — We’re going to be talking about patents. And patents are increasingly important. There’s a lot of data out there that suggests that, in the last 30 years or so, most of the value that’s being created in our economy consists of intellectual property. Now, the accounting world is actually only very slowly catching up to this. A lot of intellectual property does not show up on a balance sheet. In fact, some of the benefits of having intellectual property is that nobody knows it’s there at all. And that’s one of the things, I think, we’ll be talking about today.

Michael Blake: [00:01:41] But one of the things that I’ve learned over the years I’ve been, myself, working with advisors, and entrepreneurs, and business people is that some patents are great, some patents aren’t great. Sometimes, they are all cracked up to be. Sometimes, there are better ways to accomplish protecting your intellectual property. But I’m not an attorney. I don’t know anymore about patents than I just said over the last 35 seconds or so. So, in order to not commit malpractice and be sued because I do not have the bar, we’re going to bring on a subject matter expert to talk to us today.

Michael Blake: [00:02:12] Joining me today is my dear friend and colleague, Jackie Hutter. Jackie has been helping innovators capture the value of their ventures at The Hutter Group since 2008. During this time, and probably not coincidentally, Jackie has been named by her peers as a Top Global Intellectual Property Strategist. For several years, Jackie took a break from the law as CEO of a startup technology company where she experienced entrepreneurship from the inside, which gives her a unique perspective among patent experts.

Michael Blake: [00:02:42] Prior to striking out on her own, she was a Senior Intellectual Property Lawyer at Georgia Pacific and a shareholder at an Atlanta intellectual property law firm. She started her non-legal career as a research scientist in an innovation group of a hair and skin product company. I didn’t know that. Jackie lives in the Decatur area in a groovy, mid-century house with her husband, teen daughters, and far too many pets. Again, joining us today is Jackie Hunter.

Jackie Hutter: [00:03:08] Thank you, Mike.

Michael Blake: [00:03:09] Thanks for coming today. And how many pets do you actually have now?

Jackie Hutter: [00:03:12] Oh, gosh. We have three very large dogs, including one that’s just emerging from puppyhood that requires me to walk him about six miles every day.

Michael Blake: [00:03:22] That’s why he looks so fit.

Jackie Hutter: [00:03:24] Well, thank you for that. We work hard. And then, three cats.

Michael Blake: [00:03:28] So, how far — I mean, what is the line between having too many pets and being the cat lady from The Simpsons?

Jackie Hutter: [00:03:34] Having a husband.

Michael Blake: [00:03:39] All right. Well, you heard it here, folks. You heard it here, folks. If you have too many pets, and you want to not be clinically insane, be married. That is apparently the line.

Michael Blake: [00:03:47] So, Jackie, thanks for coming on today. I’m really looking forward to this conversation. And you and I have had patent discussions forever, as long as we’ve known each other. I do a lot of work with entrepreneurs, many of whom think they want to have patents, and you sort of help talk them off the ledge, or maybe they should have patents, and you’re like, “God, why don’t they have a patent? They need to talk to me,” like, “Stop.” But let’s kind of build a foundation here. I’m not sure everybody understands what exactly a patent is. So, talk about what is a patent and how do patents work?

Jackie Hutter: [00:04:17] Well, patents are confusing because, quite frankly, lawyers make it too complicated. It’s really a simple framework in that a patent sets out the property lines of what you want to own. And when you file a patent application, you are setting out, laying a marker, if you will, into the world that, “I have come up with this, I have invented this, and I want to own it.” And so, that’s a very important part of the process that people don’t spend enough time on. But, generally, folks will think, “I need a patent,” and not really understand why they need it and why it creates value for them.

Jackie Hutter: [00:04:59] And because there are so many people who write about patents and who actually obtain patents for a living, there’s a lot of junk that’s out there that prevents people from really understanding. But, at the end of the day, a patent is something that protects something you’ve brought — that should protect something you’ve brought to a customer, and that customer will pay for it. And in order to retain that customer — In other words, to get them to be able to continue buying from you as long as you want them to, you need to consider whether or not it makes sense to draft a — obtain a patent that actually covers that stuff. And if it doesn’t, then patents are irrelevant to you.

Michael Blake: [00:05:47] So, just having a patent for the sake of a patent doesn’t sound like a great idea.

Jackie Hutter: [00:05:51] Well, if you like to have really pretty things on your wall. For a lot of people, the objective is, “Hey, I got a patent.” And, sometimes, they don’t even think about what the value is, or they assume there’s value, and they never really care or have to figure out what that value is. Certainly, for patent attorneys, the goal is to get patents because if they didn’t, they wouldn’t be in business. But the ultimate goal if you’re doing this the right way is because you have a validated customer, somebody wants to buy what you’re selling to them. And in order to continue to hold that customer and realize that value, you should have a patent. You don’t have to have a patent, but you should have a patent.

Michael Blake: [00:06:38] Okay. So, let’s say you sold me. I want to get a patent. And, for the moment, let’s leave a side value. Maybe, I do just want something pretty on my wall, and it’s cheaper than a Warhol.

Jackie Hutter: [00:06:51] Maybe not.

Michael Blake: [00:06:52] Maybe not. We’ll talk about that later, right. But I decided I want it, how do you go about that? Can I just go down to Washington and say, “Hey, give me a patent.” How does that work?

Jackie Hutter: [00:07:01] Well, it’s a very arcane process, even for patent experts like me. I’ve been doing this for far more years than I like to admit. And the details are just way too complex. Now, if anybody is a DIYer, there are plenty of books out there that purport to tell you how to do it, and I have seen some patents that have been generated that way. Usually, they’re not worth anything, not even the paper that they’re written off, but that’s just the nature of the business. Although there are some exceptions, but they’re very, very, very extremely rare. So, then, what you have to do is you have to hire a patent expert. It’s kind of like, “the fox guarding the hen house,” as a mentor of mine used to say. When you ask a patent attorney if you need a patent, the answer is probably going to be yes.

Michael Blake: [00:07:52] Of course, you need a patent.

Jackie Hutter: [00:07:56] And that made-

Michael Blake: [00:07:56] I got to get paid.

Jackie Hutter: [00:07:57] Yes, well-

Michael Blake: [00:07:59] I don’t know if you need a patent, but I need a patent.

Jackie Hutter: [00:08:01] Well, you said it, I didn’t, or maybe I did. But what typically happens in that process – and I know this is the way the training is – we say to our clients, “What did you invent?” And this is what my retainer is going to be. And most of the time, the vast majority of time, that gets things off in the wrong direction because when you’ve talked about what you’ve invented, you’re talking about what has happened in the past.

Jackie Hutter: [00:08:32] But if patents are to have value for you in your business strategy, as part of your business strategy, you need to be looking at the future and understanding why this patent is going to have meaning for you at some point in the future. And that’s with respect for my clients, with respect to potential sales and potential customers in the future.

Jackie Hutter: [00:08:53] So, by starting with, “What did you invent?” and starting writing about the past is where most patent applications and, actually, granted patents go awry, but it’s just the nature of the business. I take a different approach, a very different approach actually. When clients come to me, I use a gate. I will not take any client who has not been able to demonstrate or will not be able to demonstrate to me that they know who their customer is, why the customer cares, and why the customer will write a check in the future.

Jackie Hutter: [00:09:31] And when they do that, and only if they can do that, we talk about why it matters for them in the future to have this protection. And very often, it won’t be relevant. So, I say, “No, you don’t need a patent. Let’s go ahead and work on another type of intellectual property that might give you even more value than a patent.”

Michael Blake: [00:09:52] I think that’s great. I’m going to go off the script here because, I think, it’s a sign of a great professional that makes a client work a little bit to hire you. And I like to think I do the same thing in my practice where you don’t want to do an unnecessary operation, right. You got to live with yourself. And, at the end of the day, the client’s going to wise up and realize you took out their appendix when it’s perfectly healthy, right. And they’re going to be mad. It’s going to harm your reputation. And Atlanta is a big small town, right. So, I think that’s really important that you go through that process, and you challenge the client to think, “Do you really need a patent?” as opposed to, “Are you looking for something really pretty to put on the wall?”

Jackie Hutter: [00:10:36] Well, for professionals like us who had gone to school for a long time and been doing it for even longer, it’s really easy to make it complicated. And it’s hard to make something simple when it really is hard. And therefore, it has become, or not even become, I think it’s always been this way in the patent world that folks just want to hand stuff over to somebody else because it’s uncomfortable and difficult to learn something new, especially when you’re professional does not take the time or have the skill to be able to explain it to you in a way that’s meaningful to you.

Jackie Hutter: [00:11:13] And, actually, that’s sometimes the hardest part of my practice is to figure out the right way to talk to this person, this client, this potential client because you have to meet the client where they are and to be able to communicate to them in a way that’s meaningful for them. So, that has — I have actually fired clients and, I think, I’ve had my clients have fired me because I require them to do the work. At the end of the day, a patent is a business document. It’s not a legal document. It’s not a technical document. It’s something that sets out your business plans, and you have to be able to execute on those business plans. That’s why I write patent applications with my clients the way I do.

Michael Blake: [00:11:54] If you haven’t been fired, and you have never fired a client, you’re not really doing your job as an advisor because that means you’re just rolling over every time, and that’s not a good advisor, right? So-

Jackie Hutter: [00:12:06] Yeah, but it pays well, right?

Michael Blake: [00:12:08] In the short term, it does. So, they talk to you. Let’s say they’ve now convince you that a patent is the right thing, and you agree, they’re going to take you on. What happens then?

Jackie Hutter: [00:12:19] Well, what I’ll do is first figure out what the lay of the land is. Usually, we all. And that’s very different than what other folks do. People, just generally, clients will say to me, “I’ve done a patent search.” Well, usually, a patent — Well, not usually. The vast majority of times, clients really have no idea what a patent search entails. It is really a specialized process. So, that, you do need to have somebody who’s trained. You don’t necessarily need a lawyer. But the traditional way of doing searches is quite binary. Actually, that’s right. You can’t have quite binary. It is binary. And it’s either, are you patentable or you’re not patentable?

Jackie Hutter: [00:12:57] So, when you say, “Is something patentable?” you have defined what you’re going to patent. That is, again, looking backward, not looking forward. So, the approach I take with clients is I say, “I don’t know what we should patent. Help me understand your business better. I will go out and look to see what others have done and what the patent world looks like.” I don’t want to say landscape. I don’t want to use existing words because it really is a graze. It’s just trying to collect information and develop a frame of reference for moving forward.

Jackie Hutter: [00:13:36] And what’s interesting in there, especially since I work with early stage, smaller companies that are seeking to create patents that are meaningful to others, to get others to potentially write a check for the rights to practice or own that technology is you really have to patent for other people, and use the language, use the framework, use the context that the folks that you want to get their attention are going to be interested in.

Jackie Hutter: [00:14:07] If you look very different from them, they’re not going to want to buy you, right. They’re not going be interested. That’s just basic human nature, whether it’s patents or not. But, also, from the standpoint of companies that don’t file hundreds or thousands of patents a year, which seem to get all the noise is about all these large companies that are filing an enormous number of patents a year, those are not most of the people getting patents. Most people getting patents are much smaller companies, and they’re getting them Wednesdays ad Tuesdays.

Jackie Hutter: [00:14:41] Those folks don’t know their patent attorneys, as well as the people themselves, they’re not experts in getting patents. So, by going out looking at the existing patent literature and figuring out what other characterizations, what other language, what other definitions the experts have used, you can shortcut. You could not only make your patent look more similar to the people whose attention you want to get, you can also shortcut the drafting process and get a less expensive and higher quality work product because of that.

Michael Blake: [00:15:12] I’m sorry, go ahead.

Jackie Hutter: [00:15:13] No.

Michael Blake: [00:15:13] So, that front-end work, then, really makes a big difference?

Jackie Hutter: [00:15:19] Absolutely. And that’s one of the biggest problems with patents in the way that I learned how to do them, as well as the way that most folks do them today is that it’s a “File it and see what happens.” Well, that’s like going to battle without having any planning associated with it, right We know what happens from that. You’re fighting battles, and you don’t have a strategy to win, or even if you can win.

Jackie Hutter: [00:15:49] So, by setting up the groundwork in advance, it’s more work, and it can be challenging for the client to be pushed in this direction, especially for technical people. Business people get this. Marketing people get this. When I sit down with a technical person, they typically want to talk to another technical expert, and they get into a siloed conversation that ends up looking like a technical diagram, right, a technical document.

Jackie Hutter: [00:16:17] And to say to them, “I don’t care what your technology is. I want to know why it matters, and why it was so hard, and why nobody has done this before because you’ve been working on this for X number of months, X number of years, and it took you this long. We need to make sure that story is told to the patent office, so that the patent office is not going to say, ‘Looks like everything else that comes in.'” I don’t want to fight that battle on the back end. I want to make sure I’ve strategized, so I don’t have to fight a battle I know that’s going to happen.

Michael Blake: [00:16:46] I bet a big challenge of that too as an inventor has internalized that story so much that they find it hard to expressly articulate.

Jackie Hutter: [00:16:53] Absolutely. Everything is obvious in hindsight, even to the inventors sometimes. And I love to get to innovators before they have actually, hopefully, started their innovation journey or in the middle of the innovation journey because what I say to them is, “As a former research chemist, so often, nothing comes together until everything comes together.” And you’re struggling, you have that pain, you don’t know how you’re ever going to get through this block that you have. And then, you’re through that block, and everything’s going swimmingly. It’s the absence of pain. You have this feeling that, yeah, it was hard, but you can’t very often re-articulate it.

Jackie Hutter: [00:17:36] So, if I can get to folks before that that they get through that process, and everything is going swimmingly, I can get them to think about, “Hey, this is really hard. This is something I need to write down for Jackie, because Jackie said this is important to the story.” And for a lot of my clients, and this is where a lot of the noise comes about patents, you say, “You cannot patent this,” or “It’s really hard to patent that because of what the Supreme Court has done.” And I can’t change what that is. And there are many people who spend an inordinate amount of time trying to pull out threads from something that is frankly unintelligible because the rules are — There really are no rules these days that can’t be articulated to a client in a way that can help them plan and strategize. In other words, it’s left up to the lawyers and, hopefully, it’ll all work out.

Jackie Hutter: [00:18:29] Well, there is one rule that has been made by the courts that is clear and unambiguous in the realm of software technology, all this stuff where all the noise is out of Silicon Valley and here, actually, in various areas. Attorneys will say, “Well, let’s just try and see what happens.” Well, that’s the wrong approach because the courts have been extremely clear that, yes, you may not really be patentable, unless you can show more. Well, you know how to show more. You show more by telling a story, and why it was so hard, and why it’s meaningful.

Jackie Hutter: [00:19:08] So, especially for my clients that are in the software-related areas, I have several of those, we work really hard to be able to articulate that story in our patent application, which is very different from what they’ve done before, unquestionably, and it’s very different from other folks. They haven’t gotten it — The patent attorneys who do this every day haven’t gotten the message that you have to tell a story.

Michael Blake: [00:19:32] What you’re describing, try and see what happens, it’s like when I ask my teenage son to ask his mother a question. Then, he yells up the flight of stairs. It’s like, “Well, I could have yelled. I’m not that old yet.” And you don’t necessarily need to be a lawyer to sort of try something and see what happens.

Jackie Hutter: [00:19:51] But, also, there’s no accountability. There’s so many ways to blame other things, other externalities than your skills and abilities as a patent attorney on why something doesn’t work out. Even attorneys I really respect, they just seem to just shrug their shoulders sometimes and say, “Hey. Who knew? You never know what’s going to happen when it gets in the patent office.” Well, I know that’s not the case because while I can’t guarantee a patent is going to grant for any of my clients, by doing it this way, we consistently get broad patents out of the patent office in a very accelerated framework. But, again, we do the work, the hard work, on the front end, which effectively lays the groundwork for getting something through the office in the way we want it to get.

Michael Blake: [00:20:37] So, let’s drill down then. Let’s say we’ve sorted it. So, actually, there’s a bullet point that, I think, needs to be made here is that getting somebody like you involved early in the innovation process really helps. It sounds like it’s harder if I just say, “Hey, I just gave birth to an innovation. Let’s go patent it.” If you think that a patent is on the table, prepare for that along the process. Is that right?

Jackie Hutter: [00:21:01] I would not say if a patent is on the table. I would say that if you’re a company that’s bringing innovative technology to a customer to solve a long unmet need that you’re investing time, effort, and resources in that, then you need to bring somebody like me in at an early stage to, at least, lay the framework for what you need to know, what you need to be looking for. Waiting to the end is typically too late. It’s not always too late, but if you’ve already made all of your decisions, it’s kind of hard to go back if you’ve made the wrong decision.

Jackie Hutter: [00:21:41] And so, having that knowledge from the front end can be invaluable. And to that point, I’ve got clients that I’ve been working with on an ongoing basis, and they know to call me. One of the reasons why they’ll call me, and I’m not with them every day, but they know how important this is to their business strategy is, we’re going to go out and talk to a customer. And this customer does X. And we want to have, at least, a short meaningful patent application on file before we go talk to these folks because they know that, because I’ve trained them, they won’t to have a patent application on file today, so that if it works, they’ll be arguing in six months about how much their already-filed IP is going to be licensed for as opposed to arguing about who owns what was successful.

Michael Blake: [00:22:29] So, we’ve gone through that process. Now, are we close then to filing an application, telling the government that we’d like a patent. How does that-

Jackie Hutter: [00:22:38] So, you file the application, and you might want to talk about costs. We can come back to that, but we got the patent application on file. The typical process is to file the slow boat through Alexander — Is it? Arlington to get the patent. And it could be anywhere from two, to four, to five years based upon the technology. And, for my clients, that’s not an appropriate timeline for most cases. Some cases, we do file during that because it’s for non-leading-edge stuff but what I had incredible success for.

Jackie Hutter: [00:23:15] And unfortunately, it doesn’t seem to be in the toolbox of a lot of attorneys out there. I don’t know why. But there is an accelerated process. You pay a little bit extra on the front end to file a patent application. It goes in a special lane, if you will, in the patent office. And we have consistently begin the examinations within about six months. And if we do the front-end work correctly, we get allowances in less than a year. That is incredibly meaningful for early-stage companies, small companies that are looking to accelerate the value.

Jackie Hutter: [00:23:48] For larger companies where patents really aren’t meaningful because they’re not going out of business if they screw up their patents or don’t get a patent, then the longer path is fine. But specifically, for my clients, we do that. The examination process is back and forth. It’s like the patent examiner says, “You’re not patentable.” We say, “Yes, I am patentable.” And what often happens is that the attorney is incentivized to get an allowance. And so, they’ll amend the claims. And if they’re not absolutely talking very closely to the business team of the client, what happens far too often is that the client is left with a patent that doesn’t cover their product or anybody else’s product for that matter because you’ve got a patent, but you don’t have valuable patent, and the attorney has done exactly what you hired him to do.

Michael Blake: [00:24:39] Yeah, which is to get a patent. Okay.

Jackie Hutter: [00:24:42] Get a patent. Yeah.

Michael Blake: [00:24:42] So, good. So, I think that covers the process. And you touched upon this. It’s important. It’s a business decision. Can you talk about a range of what we’re talking about in terms of fees to obtain a patent?

Jackie Hutter: [00:24:56] Sure. I basically manage outside counsel a day. And that’s a big change than what I used to do because there’s really no transparency to legal fees if you’re not talking to a bunch of people. It’s to consult. Yeah, I’m a consultant. I see a lot of stuff, and I’m able to make assessments in that regard. Most of them cost far more than they need to cost. Typically, these days, I’m seeing — I’m not involved because I can keep these costs down and do it in a different way. Typically, what you’re looking at from outside counsel at a smaller firm, specialized firm, you’re looking anywhere from $8000 to $15,000 on the filing. For large firms that have different business models, you’re looking at double that. There are good attorneys, excellent attorneys at small firms, and there are lousy attorneys at big firms.

Michael Blake: [00:25:49] Same way the CPA works.

Jackie Hutter: [00:25:50] Yeah. And so, cost shouldn’t really be a driver. You should be hiring the attorney, not the law firm, but it’s the same way in your business, right. So, a lot of people immediately gravitate to a named brand firm.

Michael Blake: [00:26:03] Nobody gets fired for hiring Dentons, right?

Jackie Hutter: [00:26:06] Exactly, exactly.

Michael Blake: [00:26:08] Unless it bankrupts them. That’s a separate discussion. So, a patent is obvious. It’s a complicated process, not to be taken lightly. When do you find yourself talking people out of a patent? What are the kinds of things they say to you that sort of trigger, “You know, I don’t think a patent is right for you.” What does that look like?

Jackie Hutter: [00:26:28] So, in-and-out products. I think one of your guests today may be talking about in-and-out products. Nice business models, but they have a finite-

Michael Blake: [00:26:35] What’s an in-and-out product? I’m not familiar with that term.

Jackie Hutter: [00:26:36] Something that’s got maybe a six-month timeline, one-year timeline. I like to use the example of the endcaps in Target. Products-

Michael Blake: [00:26:45] The Snuggies.

Jackie Hutter: [00:26:46] Actually, Snuggies is a great story. Actually, I use that example. I probably could have got a patent on a Snuggie, believe it or not. It seems so obvious, but there’s a story there, right. So, you probably could have gotten something if it had been skillfully done. But there’s only a limited number of people that are going to buy a Snuggie.

Michael Blake: [00:27:06] I mean, it came and went, right?

Jackie Hutter: [00:27:08] Yeah. And also-

Michael Blake: [00:27:09] So, you don’t need 20 years of protection for a Snuggie.

Jackie Hutter: [00:27:11] But, also – and this is another aspect of that – really is Walmart going to slot to two shelf spaces for completely Snuggie? It ain’t going to happen, right. So, in that environment, patents really aren’t meaningful.

Jackie Hutter: [00:27:27] The other situation, and I use this example for folks that have products, Kim Cracks, whatever you want to call them, I ask people to walk through Tuesday Morning, which I effectively think about as the Island of Misfit Toys. You walk through Tuesday morning, and what I see is people’s 401(k)’s that had been totally evacuated because somebody convinced them that they could make a zillion dollars on their new way of doing X, Y, or Z. And the people who got that product to market, the people who patented that product, got paid. And this poor person had to sell. The only way they could make any revenue, which was far less than they invested, unquestionably, is to get it to be sold into a place like Tuesday Morning.

Michael Blake: [00:28:16] It’s like the gold rush, right?

Jackie Hutter: [00:28:17] Yeah.

Michael Blake: [00:28:18] You made money selling the axes, and the shovels, and the sifting pans but not actually digging for gold.

Jackie Hutter: [00:28:22] Great example, great example. So, I want people to realize that that’s not a real outcome, a probable outcome, for when you have just a better idea. You think, it’s a better idea.

Michael Blake: [00:28:34] Now, what about the argument that because when you obtain a patent, you’re also sort of opening the kimono, right. Is there an argument to be made that, instead, trying to protect something as a trade secret just by virtue of keeping something secret?

Jackie Hutter: [00:28:48] Yes and no. It depends on how you do it.

Michael Blake: [00:28:53] Okay.

Jackie Hutter: [00:28:53] The kimono only needs to be opened. That is a real legal term, opening the kimono, but it actually falls apart when I talk about this.

Michael Blake: [00:29:01] That’s a term of art?

Jackie Hutter: [00:29:02] Open the kimono, yeah, absolutely.

Michael Blake: [00:29:05] I have no idea.

Jackie Hutter: [00:29:05] Yes, absolutely. Yeah, it goes back to the old days when it was all men. But in any event, you only have to open the kimono if your claims are related to the goods, if you will. So, if you strategically define your claims in a way that doesn’t require the secret sauce to be disclosed, then there’s less probability that that’s the problem.

Jackie Hutter: [00:29:36] So, when I talk about my software clients, my software-related clients, we’re not claiming the algorithm. Why would you do that? Because there are probably 62 other ways to do the same thing with a different algorithm, but that’s not what we’re talking about here. If you claim the algorithm or the process, you have to disclose how you do the process.

Jackie Hutter: [00:29:54] But if you’re claiming something different – For example, what the customers buy, a product – the technology enables that claimed product. The technology does not lead that product. So, you have different — The legal requirements don’t change. But because you’re setting up the question to be different, very often, what I find is that the issue of trade secret disclosure is much different when you strategically define the claims in a way that’s actually more meaningful in the long run.

Michael Blake: [00:30:29] So, as we wrap up here, I would like to invite you to maybe share a little bit of a case study. Is there a patent success story you can think of that you could share?

Jackie Hutter: [00:30:40] I have, well, a couple of recent ones, but one that I had — And they’re a little bit different. So, I’ll briefly talk about both of them. First one is a medical-related client, detection client of mine that I’ve been working with for a few years now. They came to me very early. And they have been doing some really tough research on a condition, a medical condition that if you catch it before at the right time, it doesn’t become chronic. But if you don’t catch it, then the patient suffers for the rest of their lives.

Jackie Hutter: [00:31:15] And the problem there was you have to be able to detect it, and so that you can diagnose it, but the detection was very difficult because it has to be done fairly continuously. So, you can’t have a person come into the medical imaging office once a week. It’s just not feasible in most cases. So, they’ve developed a way to diagnose it on a regular basis. Ostensibly, there’s prior already out there, but why would they be working on it if the problem has been solved? That’s a big deal for innovators. Just think about you’ve got all these people working really hard on something, that means the problem is not solved. And that was the case here.

Jackie Hutter: [00:31:53] And they’ve got some really keen insights, amazingly smart people. They’re great technologists, great entrepreneurs. And it’s been a collaborative process. It’s always a collaborative process. And we were able to get them two patents within just shy of a year and a half. And after a year of really having cracked the code on this particular innovation, they obtained very substantial licensing revenue, a license agreement from a company that makes a medical device that has kind of been a moribund market.

Jackie Hutter: [00:32:29] And my client’s technology allows more sales to be had of an existing medical device that was pretty much a flat market. And they’re thrilled. And, also, importantly this revenue is not investor revenue. They didn’t have to give up any of the company to get this revenue. But they were very strategic. It was all about customer discovery, what the customer needed, why the problem existed, and the continuous collaboration with me to make sure our patents covered that.

Jackie Hutter: [00:32:55] The second example, and this is a quick example, but it’s a fun example because it tells me that I’m doing things right, I’ve been working with a startup technology company, actually, since the day they were they were founded: the CTO, a PhD, and a CEO. And we’ve been strategically working to generate IP protection. It turns out patents are very important in this space. We can tell that because there’s lots of patents in this space. It’s got a pretty obvious signal. And they have been getting the attention of the established companies in this market because of the patents because patents are technology-virtue signaling, right. I’ve got patents. I’m doing something different. So, that differentiates them from the other startups out there. But, also, that client is now going through Series A. And I found out that there was a bidding war between two VCs over the term sheet. And I found out the reason that-

Michael Blake: [00:33:52] Is it an Atlanta company?

Jackie Hutter: [00:33:53] It’s an Atlanta company, yes.

Michael Blake: [00:33:55] Two VCs bidding over an Atlanta company?

Jackie Hutter: [00:33:55] Yes, exactly, exactly. They were Atlanta VCs.

Michael Blake: [00:33:58] That’s urban legend.

Jackie Hutter: [00:33:59] Yes. It’s this truth. But how I found out about it was because the losing VC asked for my name, and they’re hiring me for one of their portfolio companies-

Michael Blake: [00:34:09] That’s good.

Jackie Hutter: [00:34:10] … which is great. But in this case, IP didn’t drive all the value. The technology and the validated business model for my client absolutely did that. But augmenting that with IP that actually covers what the customer cares about was a definite, definite plus to that valuation.

Michael Blake: [00:34:32] So, Jackie, I’d like to get a concluding thought out of you, kind of a 30-second sound bite. Most important to think about when deciding whether or not to get a patent, what do you think that is?

Jackie Hutter: [00:34:46] So. patents really matter. When they matter, they matter a lot. And being able to understand when and when that isn’t. And if it is, how to go about getting what you need in order to grow that company value, either in revenue or an exit, is the crucial first step to any patenting process.

Michael Blake: [00:35:13] Well, this is great. So, how do our listeners find you? I’m sure they’ve listened to us for the last, whatever, half an hour or so. They’ve fallen in love with you, as they should. How do they find you if they want to ask from ask you for more information?

Jackie Hutter: [00:35:24] Well, they can see me driving around Atlanta in my red Mustang convertible with the license plate that says, “I’m a lawyer,” or they can find me online at The Hutter Group. That’s H-U-T-T-E-R group.com. And more preferably look for my writings out there. I’ve been blogging for over 10 years – actually, 11 years now – about these topics. I’m passionate about them. And more importantly, I’m passionate about people learning about the patent process and why it matters before they come and talk to any patent expert, me or anybody else for that matter.

Michael Blake: [00:35:59] All right, terrific. Well, that’s all the time we have for today’s episode. So, we’re going to wrap up today’s program. I’d like to thank Jackie, again, for coming on, Jackie Hutter, for joining us and sharing her expertise with us. I think we’ve learned a lot, and there’s a lot to sort of unpack. So, the nice thing about podcasts, you can pause, rewind, play again. We’ll have a transcript posted as well. I have show notes posted.

Michael Blake: [00:36:21] Next week, we’ll be exploring a new topic. So, please tune in so that when you’re faced to making your next business decision, you have clear vision when making it. Once again, this is Mike Blake. Our sponsor is Brady Ware & Company, and this has been the Decision Vision Podcast.

Introduction to the Decision Vision Podcast Series, Hosted by Michael Blake and Presented by Brady Ware & Company

by

Decision Vision
Decision Vision
Introduction to the Decision Vision Podcast Series, Hosted by Michael Blake and Presented by Brady Ware & Company
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Michael Blake, Host, Decision Vision

Decision Vision Podcast Series

Decision Vision is a podcast covering topics and issues facing small business owners and connecting them with solutions from leading experts. This series is presented by Brady Ware & Company. If you are a decision maker for a small business, we’d love to hear from you. Contact us at decisionvision@bradyware.com and make sure to listen to every Thursday to the Decision Vision podcast. The Decision Vision library of episodes can be found here. Decision Vision is produced and broadcast by Business RadioX®.

Michael Blake, Brady Ware & Company

Michael Blake is Host of the Decision Vision podcast series and a Director of Brady Ware & Company. Mike specializes in the valuation of intellectual property-driven firms, such as software firms, aerospace firms and professional services firms, most frequently in the capacity as a transaction advisor, helping clients obtain great outcomes from complex transaction opportunities. Mike is also a specialist in the appraisal of intellectual properties as stand-alone assets, such as software, trade secrets, and patents.

He has been a full-time business appraiser for 13 years with public accounting firms, boutique business appraisal firms, and an owner of his own firm. Prior to that, he spent 8 years in venture capital and investment banking, including transactions in the U.S., Israel, Russia, Ukraine, and Belarus.

Brady Ware & Company

Brady Ware & Company is a regional full-service accounting and advisory firm which helps businesses and entrepreneurs make visions a reality. Brady Ware services clients nationally from its offices in Alpharetta, GA; Columbus and Dayton, OH; and Richmond, IN. The firm is growth minded, committed to the regions in which they operate, and most importantly, they make significant investments in their people and service offerings to meet the changing financial needs of those they are privileged to serve. The firm is dedicated to providing results that make a difference for its clients.

Visit Brady Ware & Company on social media:

LinkedIn: https://www.linkedin.com/company/brady-ware/

Facebook: https://www.facebook.com/bradywareCPAs/

Twitter: https://twitter.com/BradyWare

Instagram: https://www.instagram.com/bradywarecompany/

Show Transcript:

Intro: [00:00:02] Welcome to Decision Vision, a podcast series focusing on critical business decisions, brought to you by Brady Ware & Company. Brady Ware is a regional, full-service, accounting and advisory firm that helps businesses and entrepreneurs make visions a reality.

Michael Blake: [00:00:23] Hi. So, if you’re listening to this program, you’re wondering about this Decision Vision Podcast. My name is Mike Blake, and I’m the first and current host of this podcast that is sponsored by Brady Ware & Company. We are a full-service CPA firm that’s headquartered in Dayton, Ohio. And we also have offices in Columbus, Ohio, Richmond, Indiana, and Alpharetta, Georgia, which is where I call home.

Michael Blake: [00:00:48] And I want to share with you a little bit about the genesis of this podcast. We have a great team behind this podcast. I’m the one behind the mic, but we have people that do a lot of work to to put this together to help organize it. And I’m just, for now, just sort of the front talent. But when you set out to do a podcast, you either kind of have this one of two perspectives. One, you just want to get on the air and talk about stuff. And that’s fine. There’s no reason not to do that if that’s your thing, but that’s not necessarily a great use of business time and resources. So, the second reason to do a podcast is you’re trying to bring something to the table, into the market that you think is a little bit different, that you’re contributing a new voice to what is already becoming a crowd marketplace of voices on the internet for content.

Michael Blake: [00:01:40] And why should you listen to this podcast as opposed to some other podcast? Well, I think you listen to this podcast if you’re interested about the thinking of business. There are plenty of podcasts out there that will give advice, and they will tell you that you should do X, or you should do Y. And maybe that advice applies to you, maybe it doesn’t. Probably most of the people who are giving you the advice have the expertise in order to do so, but you don’t really know. This podcast, I think, is different. And that we’re not telling you what you should do, but we’re trying to equip you with the tools you can think about how to do that yourself because, ultimately, that’s what adds the most value.

Michael Blake: [00:02:25] So, if you’re the kind of person that thinks that you’re a thoughtful person about business, that original thought, and that being a thinker about your business is a source of a competitive advantage, then we think you’re really going to like this podcast. And it’s only going to get better over time as we find our footing, and find out the formula that works, and we get more guests, and generate content, but you’re going to learn something.

Michael Blake: [00:02:51] And we hope you’re going to learn something in a way that is not just informative but, also, at least, a little bit entertained. We’re not positioning this as a morning drive-through show or morning drive-time show. But still, if you want people to eat the broccoli, it’s helpful to put some sauce on it.

Michael Blake: [00:03:09] So, why am I the host of this podcast? Well, in one respect, I’m the host of this podcast the same way that I’ve been a little league baseball coach: my qualifications, and I’m willing to do it. I have podcasted in the past. I hosted a podcast called the Startup Lounge Podcast, and we got to about 25,000 listeners.

Michael Blake: [00:03:28] And the thing I really enjoyed about that was the impact that we made in doing that. I’ve had a lot of people, even years after we stopped doing the podcast, stopped me and thanked me for the content we put out there, and that the guests that we put out, and the expertise that we had. They really appreciated it. So, this is a great opportunity for me to, again, get back on the a chair, and give back to the community, and provide some of the great advice, not that I have in my head, but people that that we know in the community have in their heads, and bring the general smarts that Brady Ware brings to the table. And with any luck, whatever we do, whatever we talk about will empower you to make that decision for yourselves.

Michael Blake: [00:04:15] But if you feel like you need a little bit of extra help, that you need some analysis, we’d love it if you contacted us. Yes, we’re an accounting firm, but we’re business people, and we help business people to be successful every day. We help them get out of tough spots. We help them add a zero to their net worth or, sometimes, two zeros to their net worth, and help them and their families be be successful. And the fact that the firm is willing to support this exercise tells you that we’re very interested in helping the success of the community. And this is just simply one more outlet to do that.

Michael Blake: [00:04:54] In terms of my own background, although I worked for a CPA firm and I’m a CPA, I know very little about accounting, only what I needed in order to pass my exams in business school. I’m a business appraiser. And I come to that world having been in venture capital and investment banking for the first half of my career. And so, I’ve been out there doing deals, helping people make millions of dollars, and trying to help them not lose millions of dollars. So, kind of high stakes transactions.

Michael Blake: [00:05:25] So, on the shows I host, I’m naturally going to look through things, look at things through a financial lens and a strategic lens because a lot of our practice and the evaluation practices is seen at strategic lens, but we may very well have other hosts over time that are going to host this program, and they’re going to look at things from a different perspective. And that’s a good thing because there’s rarely one single right answer, there’s rarely one single way to approach thinking about a business problem. And the more perspectives that we can make available to you, the listener, we think the more that you’re going to benefit.

Michael Blake: [00:06:02] So, we hope you’ll listen to as many of these episodes as possible. We hope you’ll like them. If there’s things that we can do better, please contact us. We’re not hard to find. And thanks for putting us on your iPhone, thanks for putting us on your Android device, and thanks for listening to us through whatever your preferred podcasting platform is. Thank you.

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