March 28, 2016
By Bob Coleman
Editor, Main Street Monday
Mike Carter has over 15 years experience in enterprise software and technology services. He’s founded three software companies. Mike was chief marketing officer of a publicly traded billion dollar Internet company and has been called one of the top 100 people globally in Fin-tech.
Bob Coleman: Around 98 percent of all small business owners do not know what the value of their business is despite the fact that it typically is the largest, single asset in their foundation for retirement. Michael Carter, CEO, BizEquity. That’s an alarming statistic, isn’t it?
Michael Carter: Yeah, absolutely, Bob.
Bob Coleman: Tell me what you do. What do you offer to that small business, that Main Street entrepreneur that gets that number down from 98 percent to a more reasonable level?
Michael Carter: We offer a better, faster, and cheaper way to find out that knowledge. And if you think about it and we make this analogy an awful lot is the old way 10 years ago, 12 years ago to figure out what your home was worth you had to get an appraiser to come into your house, you would take a couple of weeks to schedule that, you’d have to wait for the person to tour your house, then you’d have to wait a week or two to get an appraisal from the appraiser on the biggest asset for consumers which is their home.
Now the biggest asset for business owners is their business and before us there wasn’t a Zillow type of an approach to do it, so I always make that analogy because I think it’s a clean one. The old way to value your home was offline, time-intensive, and expensive. Similarly the old way to value your business was the same thing and like Zillow and Realtor.com ushered in a whole new way to do it using big data, the earliest users I think of big data where it was really Zillow in the states and Zoopla in the United Kingdom in the real estate market. We’re doing the same thing but for business valuations and we’re doing that for the business owner. But we’re delivering it through this network of advisors that include your local community banker, your wealth advisor, your insurance agent, your trust and estates counselor or your business coach, so that’s what we do.
Bob Coleman: Well, you learn something new every day. Zoopla, is that in the UK? I’ve never heard that before. Is that the UK equivalent of Zillow?
Michael Carter: We have an office in London, Bob, so if you say Zillow you get these blank stares. And a very close friend of mine and our investor, when I would go to these meetings with him in London when we were first launching the office there he would say Mike, these US-centric companies and I’d say what do you mean? He goes your Zillow is our Zoopla. I said, okay, note to self.
Bob Coleman: Now I know what my house is worth sort of.
Michael Carter: Yeah.
Bob Coleman: My neighbor sells it down the street, it’s being listed, so that’s a fairly easy metric. Mike, I run a dry cleaner, next door is a pizza shop and then maybe down the street is a car dealership or a Firestone tire dealership, so I don’t have a sense of what my business is worth. So you said big data, how do you bring all this together to separate those three different type of entities?
Michael Carter: Yeah, awesome question. So we constantly – we do something called machine learning which is a fancy way to say that we constantly scrape anonymized private company information that’s made public and that can become in certain states it’s mandatory when a company sells over a certain size, that some of that information is known. But there’s also loads of different databases that exist that professional, offline, independent business appraiser’s use and those databases cost say $5,000 a database a year per person to know certain comparable figures for the sale of dry cleaners in the State of California, for instance.
Bob Coleman: Right.
Michael Carter: Or the sale of restaurants and pubs in the Northeast of the United States. So what we do is we don’t just go after the information that’s in the public domain that’s private, right, of private companies that’s anonymized, but we also have invested a significant sum in comparable databases that a normal person on the street that’s running a two-person business appraiser shop couldn’t afford. So if you think about it their biggest expense is probably besides their office location or rent, which a lot of these folks work in their house, it’s the databases that they use to do the business valuations, right. What we do is we have access to over 130 different comps or comparable sources just in the US alone and we constantly monitor the changing values of those businesses, so that’s how we do it. So to your point now with homes it’s pretty easy because you can get that comp data from Zillow or Realtor.com or you can walk to the Main Street of your beautiful town, Bob, and say oh, the real estate office is showing that this house sold for x, y, z. That doesn’t exist for the business market. It’s this black art, but we’ve shined a light into it and used big data to get at that information in a real time basis, so everyone can benefit including accountants that do business valuations now or even use their own product. So our goal is we really want to become the standard way people view business valuation and private company performance.
Bob Coleman: Cool, and you already answered my next question which was how many different databases you use, you said 130. Give me an example of just one if you can.
Michael Carter: So a lot of the databases we use we can’t discuss because they say, well, we get individual users paying us $5,000 a seat. We’ve done a group purchase where we do a larger purchase and part of our clauses are just don’t tell people who use our data. That being said I can name a couple. So one that we utilize and we have great affection for is Bizcomps and Bizcomps is a great data source for companies that are smaller, say less than $5 million, and predominantly on the West Coast and that are more the typical retail operation of those types of businesses and we work with the Bizcomp’s databases as well as 129 other databases that are out there. That’s a source that would give you an example of the type of data that we utilize.
Bob Coleman: Well, I’ve played around with your database, it is an amazing product. You can pull up any state, any city in any state and there’s all the small businesses and you could slice and dice any way you want. It’s an amazing product, but who uses this? Tell me what the practical applications are. You mentioned CPAs, you mentioned your business valuators, but who else can use this data?
Michael Carter: And that’s a great question as well. So when we went to market we made the analogy it’s Zillow for business and business valuation which we’ll talk about I think later really has the chance to be what the credit score is for consumers. The business valuation score should really be for business owners and their ability to receive commercial loans. But that’ll take a few years, right, to materialize and we went to where – to use the hockey expression being on the East Coast, we went to where the puck was going, not to where the puck was today and where the puck’s going we believe is this business valuation score being the FICO for business and rewarding them for the value they’ve created.
That being said, so what do you do in the meantime? What you do in the meantime is work with people that are already working with business owners and if you can help them help the business owner you can help them bring in more business and better take care of their existing clients. So that boils down, Bob, into three main vertical or target markets for us. One is and which we’ll talk about in more detail later is the community banker and working with the community banker to help them prospect for loan opportunities in their respective markets and to help them serve the business owner better.
Two is the wealth management community. There are north of 260,000 wealth managers in the United States, also known as estate planners, also known as registered investment advisors and they exist to help preserve people’s wealth and their best clients are business owners. So the rush of technology that these wealth managers have utilized the last ten years had to do with giving 360 degree views of an individual’s portfolio to do estate planning, but what’s emerged is their best clients. So a quarter of a wealth manager’s book of business is typically entrepreneurs or business owners, they’re their best clients, a quarter of their book are these folks, but how can you do an estate plan if you don’t know the value of their biggest asset which is their business. So it’s easy speeds and feeds to figure out how many bonds you have or your Vanguards, stock account portfolio, what that’s worth, what the delta is between what your home’s assessed with on Zillow and who you owe in a mortgage, stuff like that. But their biggest asset they couldn’t determine which was their business value, so we work with wealth managers to help them retain their customers and provide estate planning knowledge.
Then the third area which is a big market for us is actually insurance. It’s been noted by Bolt Research that 50 percent of businesses are underinsured and 40 percent of business owners don’t have any life insurance. So it’s a big market to help the business owner make sure that their family’s protected God forbid they pass on, but by helping them you’re helping the insurance company or the insurance agent or advisor increase their book. So just since last May, mid last May of ’15 we have over 700 advisors using our product and they use it, Bob, in a white label or private label format and that can be found on our web site when it says what we do underneath. That would be called advisor office and banker office, so the advisor office and banker office products are our two leading products.
Then the fourth vertical that we’re going into is the accounting vertical. We have the former head of the American Institute of Certified Public Accountants is on our board and has been instrumental in helping me and the team build the company, his name’s Clarence Davis. So what we’re doing is going to where the puck’s going with this essential knowledge for business owners, but going there by being the Intel Inside, to date myself the Intel Inside of business valuation in targeting these financial institutions that are already working with business owners.
Bob Coleman: Well, I should have known that line, going where the puck is going. One of my sons played hockey all through high school, but I never heard that term, so again you’re teaching me a lot today, Michael, I appreciate it.
Michael Carter: I highly doubt it, Bob, but I appreciate the comment.
Bob Coleman: Community bankers, that’s the predominant listeners to this podcast. I was an old banker, I am an old banker I guess and I learned when you made a loan to someone you looked at cash flow and character and collateral and I was never taught how to finance a business based on the value of the business, that business valuation score. So help me out, help out my community bankers on why they need to know what a business valuation score is and how’s that going to change their world.
Michael Carter: Thank you. So I don’t think that to your point your training never had that because it’s a new concept and I think if you – when you were saying it you stepped back and listened to the words you used, Bob. It’s interesting, right. You judged a business owner or a business not based upon the value of that business.
Bob Coleman: Right, right.
Michael Carter: That’s like saying – which is so ironic, right. That’s like saying you’re going to judge a consumer, but not based on how much money they make. So our view is, of course, that’s never been done before because there hasn’t been a mechanism by which to properly valuate business in real time in less than ten minutes, so that an underwriter or a risk manager or a credit manager at a bank can ascertain the business value better, faster, more cheaply than ever before.
So we view this as business owners – since the Fair Credit and Reporting Act in ’71 I think it was and that helped usher in this idea of – it helped usher in a whole bunch of regulation, not that I’m for regulation, but it ushered in the whole thing about treating consumers more fairly and a credit score and a common language for that credit score. And if you witnessed the last 40 years and really the first 30 the credit card companies and the consumer lending that absolutely just exploded from it, I think the same measure is needed for – which we should talk about in more detail, Bob, because I love your expertise on it, but I think the same legislation or exposure or transparency is needed for the small business market and the business owner, so that they’re treated more fairly.
Now what’s happened is the online liners have come in and helped business owners get loans faster and more efficiently than ever before because they’re looking at a whole bunch of different attributes to that business owner meaning to their business, but for Main Street USA, unfortunately, the community banking infrastructure doesn’t look at what a business is worth today. And we hope to usher in that new fabric of understanding into the banks, so that they can look and treat business owners more fairly. Now that being said we don’t lead with this, so this is a forward-looking conversation because of our respect for you and your knowledge in the banking industry. We don’t go around talking about what we’re going to do, keep it pretty private, but that’s the opportunity we see.
So today how we go to market is we focus on the numerator side, the revenue production side, by helping bankers figure out and help business owners what their business is worth, so that they can engage and give them knowledge and then that business owner will say, wow, you are my community banker, you’re helping me not just reading off of the offers that the bank’s offering and what the interest rate is, you’re actually treating me like somebody important in the community that you want to assist and develop my business with. So that’s how we’re doing it today, but tomorrow meaning in a few years I think it’s going to quickly emerge that business valuation knowledge and that scoring will be a critical piece of the overall lending discussion.
Bob Coleman: Well, what I like about the score is it’s a nice conversation starter and it’s probably a better way to start than hey, what are your annual sales or how much cash do you got in the bank. And so I think it’s very valuable for all entities who use it, the people who use your tool to go out and talk to Main Street as well as for the Main Street owners themselves. Hey, Michael, you said ten minutes to input stuff. What am I inputting?
Michael Carter: You’re inputting a segment of the current year’s financials and their projections. So, example, revenue, potential pre-tax earnings, officer’s compensation, liability data, growth rate, so it’s essentially – call it 40 to 60 data elements that you’re entering, the current year and the previous two years. To get a valuation you just need at least one year, so you need at least the current year’s projections and obviously the more thorough the valuation becomes the more data that you enter in.
So if you did all three years and you had that information handy or top of mind you could get through in nine, ten minutes, we’ve timed it. If you just wanted to do a quick and dirty current year, we’ve even seen people be able to do it in three to four minutes and all along the way as they go, Bob, it’s like Turbo Tax. If any of our listeners have ever used Turbo Tax, as they input data they see the valuation of their business change, so it helps the business owner see how their business is being judged. So we really believe in transparency with our methodology and our approach and creating this standard, so yeah, that’s how it works.
Bob Coleman: Well, good. I love it. Cost, what’s this going to cost for me to access your big data?
Michael Carter: So for a business owner and again this is not our core market, but we allow this to happen to show everybody that the product – see, it works, trust us, you can go on today and that was very important over the course of the last four years to have that availability. For the business owner it’s $499. For a banker we do packages and it ranges anywhere from $499 to $999 a month for an actual community bank where they can run up to 100 full valuations on a hundred different businesses a year and have that search feature that we talked about where they can search in their local geography or geolocation and look at businesses in the area and what they could be worth to help them prospect smarter. So we really package it up and if you think about those price points it gets down the valuation close to 40 or $50 for a full 29-page report if you go through your local community banker.
Bob Coleman: And as you said you could slice it, dice it by geography footprint, by industry segments. I enjoyed playing around with the database a little bit, it’s very interesting. Let’s see, American Bankers Associations took a liking to what you have as well. Tell us about that endorsement.
Michael Carter: Thank you. We were blessed. We’re the only endorsed business valuation and private company performance service or technology by the ABA, the American Bankers Association, a great voice for the local community bankers. They I think have close to 5,000 members and we worked with their head of that partnership, SVP of partnerships there, Helen Sullivan, who was absolutely terrific to work with and what it really means is they did extensive diligence north of eight months in understanding our product, our methodology and how it could help the community banker. And what they had heard from a few focus groups and their subcommittees at the ABA was the fact that the community banker and/or the community bank needs a better way to prospect for commercial loans. So one of their most valuable products or services, right, where they make the most money is commercial lending yet the online lenders are beginning to eat their lunch or at least their breakfast for now and so how could they use “big data” to help and penetrate the business market.
They found us through a really dynamic banker that you probably know, Tom Petro, and Tom is the CEO of Fox Chase Bank and is on a board for the ABA and a very forward-looking banker. And Tom had become a client, we didn’t know Tom prior to meeting him through BizEquity and he loved the product and his line was always I want this to be in the folder of every one of my bankers. When they meet a business owner I want the business owner to know we’re a different bank, we’re an innovative bank at Fox Chase and Tom was truly terrific because Tom said I know this is not going to help me, but I think it’s going to help the industry. I want to introduce you to the ABA because I think all my peers need this solution. Through that introduction that’s how we got into the ABA and as you know last week we just won a big award from Bank Director Magazine for our collaboration with some of our clients. So, yeah, we’ve been very impressed by the ABA and the community bank members they have, so we’ve been blessed to have that endorsement.
Bob Coleman: What I like about your product is you are using big data to give the community banker something in hand when they go talk to a prospect. As you said the online lenders – I don’t know if they’re having – I don’t think they’re quite eating lunch, breakfast is a good analogy.
Michael Carter: Not lunch, maybe a cup of coffee. Not breakfast.
Bob Coleman: I was going to say maybe a donut or an appetizer.
Michael Carter: Yeah.
Bob Coleman: But the advantage to online lending is they’re using speed to market to make these offers, but the community banking industry isn’t sitting on the sidelines. Wall Street Journal yesterday had an article about a bank who does a five-minute turnaround on approvals. So the bankers are not the old, stodgy, cigar smoking, sitting in the office with no computer at their desk that a lot of the thin tech lenders sometimes think they are. But thin tech, you have this wonderful chart, I hope it’s on your web site, 1,042 thin tech lenders, 15 billion in funding and you have a lot of their logos up there.
Michael Carter: I think you’re going to see more and more of it as these online lenders are pivoting from peer to peer lending which meant consumer lending to commercial lending because it’s more lucrative, right, a bigger market for them. And I think that that ends up being the predominance of their business and to your point it’s been speed and ease, right.
Bob Coleman: And he didn’t care that he was paying 50 percent because he said I don’t care what it cost me. He said if I don’t pay it I’m out of business.
Michael Carter: Exactly, exactly, and he knows and people know that oh, they’re going
to look at different – they’re going to look at big data, they’re going to look at other things besides credit score and current income. They’re going to move quickly, they’re going to look at different elements of my business and I can secure this financing quickly. But yeah, you’re absolutely right.
Bob Coleman: If you get a chance I strongly encourage you to check out BizEquity’s web site, but I have to ask you this one personal question. A board member of Arthur Ashe Youth Tennis & Education Center out of Philadelphia, tell us what that’s about.
Michael Carter: Arthur Ashe was a great personal hero in terms of what he accomplished not just on the tennis court, but off the tennis court. And there’s a local non-profit that one of our board members, Pete Musser, actually helped to start that was called the Arthur Ashe Youth Tennis & Education Center and now it’s called Legacy and I was a board member there for many years. It really supports teaching the school of tennis everywhere, inner city and different areas of the town or different areas of the city and growing up as a tennis player and I think you are as well, Bob, I think we all know that it teaches great life skills, it teaches you competition, it teaches you how to think for yourself. You’re alone out there, right, on the courts.
Bob Coleman: Yes.
Michael Carter: And like you are a lot of times I think in our careers and different parts of life and it teaches you lifelong skills, tennis does. So the ability to expose that and make that more transparent for everybody because it shouldn’t be socioeconomic or cost-related and that’s what Arthur Ashe has done a wonderful job of and I was happy to be part of that in any way I could have.
Bob Coleman: Well, good for you. Thank you for giving back to the community. It’s very, very important. Michael Carter, CEO, BizEquity. You can check him out at BizEquity.com. I know he’s on LinkedIn. Just type in Michael Carter and you can get his contact information. Michael, I enjoyed the conversation.
Michael Carter: Thanks, Bob, as always.