Robert Snowden ASA, ABV: Business Valuation And How to Increase it

[00:00:00] Quick background, Portus Wealth Advisors, wealth management firm here in Charlotte, North Carolina. Uh, over the course of the last couple years, we’ve really started working with more and more small business or business owners in general and the, um, kind of the one to five million dollar net income type level.

And so as we’ve gone down that road, um, have Learn more and more about the business owner and part of today and going forward as a way to bring that forward. So I’m excited to get this kicked off. Um, john, you want to talk a little bit about our series? Um and introduce our speaker today. Yeah, so this is the first installment of What we are calling charting opportunities for business owners Our plan is on a monthly basis to provide [00:01:00] A newsletter and then the following month a an event whether in person or virtual like we’re going today covering business topics that owners Hopefully are very interested in and can get some takeaways have an opportunity to hear from a resident expert on the topic that we’re covering give them a chance to share And then give you guys a chance to ask any questions that, uh, you’d like to ask.

Um, we’re kicking off the series today, uh, we’re going to discuss, uh, business valuations. Um, happy to introduce our first guest, uh, to the series, Rob Snowden. Uh, Rob is with South Park Advisors here in Charlotte. Uh, he is very well known throughout the advisor community. He is the best of the best among business evaluations.

Uh, Rob, [00:02:00] welcome. Thank you for joining us. Uh, do you want to give us, uh, 30, 60 seconds, uh, on yourself and your firm before we get kicked off? Sure, uh, you know, uh, thanks William and John for having me here. Um, so, as, as, uh, as John said, my name is Rob Snowden. I’m the founder and managing director of South Park Advisors, an independent business valuation firm.

That spends a lot of time in the business succession planning wealth preservation space. It’s about two thirds of our business. Um, We do, uh, we value companies anywhere from, um, you know, main street businesses up to a billion dollars in revenue. And we’re non industry specific and literally have been involved in, in hundreds.

Of different industries and industry subsegments, you know, we prepare valuations for a state and gift tax reporting, uh, business succession planning, exit planning by side and [00:03:00] sell side ESOP representation as well as, uh, get into litigation and family law. Um, you know, some of the, the unique niches that we have are mediate, mediating, uh, disputes between business owners to keep them out of the courts.

Um, and we have offices currently in, uh, we, we were headquartered in Charlotte with offices in Rochester, New York, and Phoenix, Arizona. Awesome. So the format today, Rob, I know you can talk for probably. hours and hours about the valuations and the ins and outs. But what we’re going to do is, William and I are going to ask you some, a few questions that we think are probably top of mind for business owners.

Have you give you a chance to answer those? And then, like I said, at the end, we’ll open it up. See if we have any other questions. Okay, great. So to start off from a high level. Uh, a business owner that is considering selling their business, um, what do they need to think about for, before they get to that [00:04:00] point, right?

As they’re starting to think about, hey, over the next three or two, three or four or five years, um, what should I be thinking about in terms of my business succession? And then who should be involved in the planning, uh, of getting it to where I want it to be? Well, I think it’s, as a business owner myself, we get very, uh, Uh, accustomed to managing our businesses and working through our day to day and sometimes lose a sight of our long term professional and personal goals.

If there’s one thing I could impress on business owners today, is that You know, exit planning, it takes time. What I can tell you from my experience is about 1 in 25 are active in their estate planning and their business succession planning. Um, you know, the typical, uh, client that we, uh, work with is, uh, average about 78 years old.

And sometimes, um, [00:05:00] they’re just getting to the point of excess at 82, 83 years old. In general, it takes about 3 to 5 years to develop a good. Uh, succession plan. You know, business owners, um, will get focused on one thing and another. The main one might be, well, what’s the value of my business? Um, you know, the other might be, uh, you know, more emotional.

Uh, you know, I’ve done this my whole life. What am I going to do when I retire? Uh, that can come into play. Um, Um, you know, typically what we see is a situation where, you know, there’s, you know, somebody’s passed away. It’s been a birth of a grand, a child, or there’s been a significant health event. And then that business owner wants to exit the business immediately.

And that’s often at a critical time. At a cost that they’re willing to take a, you know, a discounted price on their business just to get to the next [00:06:00] stage of their life. Um, in terms of who should be involved in the planning process, it’s very important to understand that, um, there are a lot of, um, uh, things that go on when you’re trying to sell a business and, and get to retirement.

So obviously, the value of your business is important. Um, you want to have a valuation advisor or an M& A professional involved, uh, you want to have, uh, uh, a CPA, uh, uh, an accountant, uh, involved because, you know, okay, we have to sell the business, so what are the tax implications of that business, and there may be ways to structure that transaction so that, You know, it’s tax advantageous.

Uh, the third person that should be involved obviously is, is your corporate attorney, you know, to help you, uh, to protect the deal, to protect you against the reps and warranties that are associated with the deal and cover all legal aspects. [00:07:00] And then finally, you know, once you do, uh, You know, achieve that successful sale.

You need to bring your wealth advisor in to help you, uh, to, to manage those proceeds to ensure that you’re going to live comfortably, uh, into retirement. So if I’m a business owner, a lot of the times I’m just focused on one potential buyer, right, and just selling 100 percent of my business to this, this buyer, not necessarily thinking that there are other options.

What are other options? If that’s not necessarily what I wanted to, yes, certainly. You know, when you think about there are three or four main options. One is you sell the insiders, you sell to a key management team or key employees. Uh, you can sell to an outside side or whether that be a third party buyer, you know, private equity group or, uh, uh, industry participant.

Um, and then the other thing, the other, uh, [00:08:00] avenue is that you can, uh. Potentially sell the company to your employees and each has its pros and cons. Um, and and certainly um Need to be weighed and thought out. Uh, not every company is perfect for an employee stock ownership plan uh, but the those that fit that Uh that mold in that criteria and that culture tend to perform very well For business owners that are looking to really just maximize the value Uh, of their business, sometimes going the M& A routes more advantageous, but what we often find with, uh, clients and business owners in the Carolinas is they’re really worried about, you know, Richard and Barbara, the employees that have worked with them for 20 or 30 years, what’s going to happen, uh, you know, when I retire.

And certainly there are. Um, ways that you can structure the sale of your business to ensure your [00:09:00] legacy and to keep that business, uh, potentially moving forward so that, you know, it does benefit the employees in the future. So, um, great point. I mean, I think a lot of business owners. Care deeply about those folks that have been around for 15, 20, 25 years and want to make sure they continue to have a good path forward.

Um, as we dive into the valuation a little bit, can you talk about what’s the valuation process like, right? What should the business owner expect? They come, they sit down and say, Rob, um, I need a valuation. to have a better understanding of where I am now, where I need to go. What, what should they expect out of that process?

A good valuation professional will try to understand what you’re trying to accomplish and, and structure the engagement around, um, meeting those objectives, um, while there’s a lot of math involved in finance and, [00:10:00] and, and, uh, financial theory, um, you, you know, you have to truly understand the facts and circumstances surrounding, uh, uh, The engagement process.

So, you know, a good, a good valuation team will the first thing they’re going to ask you is why do you need the valuation? What are you trying to accomplish? You know, and set the stage that way. Uh, then the next part of it is just, you know, getting into information gathering, getting all that financial information and, you know, uh, Trying to become almost what we term situational problem solvers.

Like what, what is the business doing well? What is the business not doing well? Uh, what’s, what, what are the economic industry and what are the economic and industry conditions like at the time that we’re trying to value the company and where’s the company headed? Um, you know, so. You know, we [00:11:00] will digest all that information and we like to get on a call or a series of calls to talk with the business owners to understand more about the business.

Uh, the reason being is no one understands the business better than you. So we’re trying to get into the heads of the business owners to understand their perspective on the business, as well as develop our own independent perspective and bring all the facts and circumstances together. Yeah. Yeah. So more than one way to skin a cat, one more, one, more than one way to kind of approach valuing a business, right?

I think we were talking about this earlier. There are a few different ways that you approach when you bring on a business owner. What are those three ways? What’s the differences? When, when do you do which approach? What makes sense? At what point, right? Yeah, you know, certainly there, there are different ways to value a business.

What I, what I can tell you is that, um, all businesses, uh, for the most part or, or a majority of businesses [00:12:00] are valued predominantly on the underlying cash flows of the business. You know, uh, one unique aspect, uh, that what we would term that to be an income based approach is that when you’re managing your business daily and getting, trying to get, you know, um, Things established and in by the end of the year is that the number one priority of a business owner is, um, to minimize their tax burden.

However, when you’re selling a business, what you really want to be doing is maximizing your cash flow potential. So, you know. You know, we’re going to discuss, uh, within the income approach, what are the necessary add backs, you know, uh, you know, sometimes it’s just easier to take residual earnings and flow it through, um, officer’s compensation.

You know, so you might, you might be taking above market [00:13:00] compensation for those reasons. You may own the real estate and you may say it has some discretionary spending, uh, going on. And looking at that is important because the end of the day, you know, a buyer of your business is only going to pay for the.

The realizable cash flows, what they can recognize as being the true cash flows of the business. So, in, you know, some extent, if there’s, you know, unreportable income, it’s going to be difficult for you to get value for that if the business owner can’t identify it and recognize that it’s real. Um, but, you know, that’s an income approach.

You know, uh, you know, we can either look at history as a, as a proxy for the future results, assuming you have a relatively stable or predictable business. But in businesses that are growing and adding new product lines and, you know, locations, it’s [00:14:00] generally more appropriate to look at a discounted cash flow analysis where we, you know, forecast out, you know, three to five to seven years of your expected cash flows based on, you know, the, uh, the, The items that you’re putting in place to create that growth.

What, what are the factors that are driving that growth? Now, you know, usually when we talk about, uh, forecasting, it really makes business owners very uncomfortable. I know what my business is going to do one year out, and I might be able to get you a second year out, but three, four, and five, well, that gets very difficult.

And that’s just the nature of forecasting in general. We were taking into account the facts and circumstances of what we know today and trying to predict what’s going to happen in the future. Obviously those. Financials may change every six months, 12 [00:15:00] months, 18 months as new information comes to light.

And as we get farther into, you know, uh, uh, as we get farther into those years in which we have forecast. The last way to value a business is an asset based approach where we simply just take and mark to market the assets and liabilities are on the balance sheet. And what falls out is your equity value.

Now. In most business, I’d say in almost all businesses, you know, net asset value really represents a floor value. What you’re trying to do is create value above and beyond, uh, the net asset value of your business. Otherwise, we term it as kind of, well, you’re just making a living. Uh, if you’re in a situation where your net asset value exceeds, You’re, you’re a cashflow based value, then an argument can be made in some circumstances that [00:16:00] the business may be worth closing down because you can realize value from your assets more than from its cashflow generating capacity.

So in other words, the business isn’t profitable. The forecasting is it for not to be profitable and take that asset value, shut it down, take the equity. It happens in some circumstances. Talk to me about fair market value versus strategic value. Here are those key words. Yeah. Yeah. I think it’s very important to understand the difference between fair market and strategic value.

Fair market value and strategic value is a business owner. Um, you know, what we see a lot of times is a business owner says, well, uh, I’m, my business is worth $18 million and I’m not gonna take a value. Unless it’s 18 million dollars. Well, it’s, it’s very, it’s, it’s It’s not beneficial for a business owner to necessarily get locked in on a particular value [00:17:00] because it’s value changes again based on the type of buyer that may be interested in the business.

Um, for instance, um, you know, if I’m a fair market value assumes a financial buyer, it’s somebody that’s going to come in and they’re going to operate that business in the same manner that you do currently. And so, you know, we, it’s, you know, it’s usually willing buyer, willing seller. Um, you’ve got a business you want to sell.

I want to buy that business. We’re going to come to the table and we’re going to, uh, have equal information. We’re going to understand all, all the aspects of how the business operates. And we’re going to come up with a value that’s fair and reasonable to both of us. The reality is, is, well, the other type of buyer is a strategic buyer.

And a strategic buyer is looking is what a strategic buyer is, is it’s typically an industry participant, and sometimes a private equity group where [00:18:00] they’re looking at your business to purchase it because they’re saying, well, there’s some synergistic benefit, it’s going to help me to increase my revenues, decrease my expenses, or some combination of that, uh, is going to drive it.

greater cash flow and that’s why a strategic buyer is willing to pay more than a financial buyer because they can, they can realize benefits that a financial buyer cannot. Um, you know, the problem with strategic, you know, trying to estimate strategic value is it’s, it’s value specific to the buyer. So if the buyer doesn’t tell you, you know, what their true motives are, you can’t necessarily.

Predict what that price is going to be, and it can be extreme. It can be in some instances for tech businesses. It can be significantly, substantially higher than fair market value. Um, but, you know, [00:19:00] strategic value, you can think of it this way. You’ve got a business you want to sell. Uh, I want to buy that business.

Uh, you’re going to disclose only the information that I asked for. And I’m only going to tell you what you need to know in terms of how I’m going to use the business. And we’re going to negotiate. And there’s often a winner or a loser, uh, in that situation. Because it’s, it’s, the business becomes subject to a negotiated price.

Uh, now if your business is commanding a significant premium over fair market value, well, then the business owners typically, uh, the winner in those transactions, uh, uh, uh, from their perspective, from the business owner’s perspective, because they’re going to achieve value than they would otherwise. So, um, we talked a little bit earlier about the three different, or multiple types of buyers, right?

So there’s financial buyer, there’s strategic buyer, there’s key employee, and then there’s ESOP. Um, kind of thinking, I would [00:20:00] imagine most folks, um, that we talk with initially think more about the strategic and the financial and maybe, um, so as we think about that, Are there different drivers of value or different things that a strategic buyer comes to the table and looks at a business and says, these are my top items, or are there different things that a financial buyer will come to the table with and say, these are my top items, or is it all situational dependent, or are there some highlights that you can kind of talk about?

A lot of it is situational, but one of the things a financial buyer looks for is, uh, continuity of management. That’s the big, that is a big one. And the re you know, who’s going to run the business. If I buy the business and maybe I’m just an investor, it wants the business to operate. Uh, you know, if I buy the business, who’s going to operate it.

So key consideration becomes a focus on who are the key [00:21:00] individuals in the business. Can the business operate without the business owner? We’ve seen a lot of great cash flowing businesses. Businesses that don’t sell because there’s they the business owner is And a lot of times it’s one business owner that owns a hundred percent Is, is the key person and they haven’t built out their management team.

They’ve retained all the control over the, uh, the day to day operations, and they haven’t been planning for that exit. So that is a number one concern. The other big concern for financial buyers as well as strategic buyers is the quality, the overall quality of financial information. Um, You know, we see a lot of, uh, situations where companies grow rapidly.

They started with a bookkeeper and the bookkeeper has done a great job, but now the business is outpacing the, the [00:22:00] capabilities of the bookkeeper it’s become. You know, maybe you started as a 5 million revenue company. Now you’re 25 million. So now the books aren’t as clean or up to date or have, you know, uh, um, Issues with in terms of the entries that they’ve made in the books That only get cleaned up maybe by the cpa at the end of the year Well what I can tell you from my experience is that you know, we for businesses generally under 10 million dollars in revenue We spend a lot of time just deciphering and untangling financial statements before we even begin valuing the company as you get larger, um, you know Say, you know 15, 20, 25 million in revenue.

Typically, you’ve brought in a controller to help out and potentially a CFO as well as you get larger and, and, and now, uh, you’re also requiring a greater [00:23:00] level of financial reporting from your CPA and it makes for a much easier, uh, uh, sale in the, in those instances. In terms of a strategic buyer, what their main look is, believe it or not, is, um, you know, Depending on the nature of what, of the purchase, a strategic buyer might be looking at mainly a cultural fit.

I’ve got three or four companies that all operate the same. And if I bring in this fifth company, is it going to fit with the culture that’s already established? Because one of the things that can impact, uh, the value of a business, you know, is whether or not, uh, the, uh, The next business in is going to fit.

It can have a, it has big financial implications and we’ve actually seen situations where companies have had to unravel because of the lack of [00:24:00] cultural fit. Um, the other thing, you know, of, you know, strategic buyers looking for potentially is, you know, if I purchased this company, what, what. Synergistic benefit.

Is it a system? Is it a process? Is it a product? Is it services? Is it people? Um, you know, uh, we valued a manufacturer of a pipe, uh, company that had the small end of the market and the large end of the market, but they didn’t have a middle, the middle of the market. And they paid A really great price to acquire a private closely held company that filled that hole.

And so they expanded their capabilities to offer piping across, uh, the, their entire cost customer base. That’s a really good point. Um, you mentioned a little bit in there. Um, about the, um, the [00:25:00] issues that pop up as you’re starting to dig into the valuations of companies and just thought it was a good chance to kind of untangle that a little bit.

Like, what are some big, um, some big issues that you typically see? You walk in, first time valuation for the business owner, um, it’s classic to see this isn’t right, or this isn’t right, or, um, or they’re big kind of takeaways of, um, Uh, um, kind of synergistic top issues that pop up for business owners as they go down this path.

Uh, some of the top issues are, um, you know, um, dealing with non operating assets is a big one. So, I own a business and I own it 100 percent and on the balance sheet of the company, I have artwork. I have, um, you know, four plus million dollars in excess cash, uh, parked away for a rainy day. Um, and [00:26:00] I’ve even seen situations, um, in my career where there’s not been one Learjet, but there’s been two Learjets.

And so when you’re thinking about business succession planning and exit planning, I You know, and someone that’s owned or a few people that have owned a business, you know, um, and not had to worry about these items is that any assets on the balance sheet of the business belong to the shareholders of the company.

So, um, you know, removing, you know, any real estate that’s not used by the business, any non operating assets. Uh, and getting the excess cash off the balance sheet, you’re going to have to either do it before, sooner or later, uh, because obviously those aren’t the items that you want traveling, uh, with the sale of the business and certainly big assets like, you know, the plane example is a good one is, um, you know, [00:27:00] uh, You want to get that off the books of the company, um, other, other key issues we see are, um, you know, um, family members, uh, not active in the business and drawing salaries.

It’s good to get that off your books as you get closer to an exit or, you know, real, we own the real estate and a separate entity, which is a, which is good, but we’re, we’re paying above market or below market rents. You know, cleaning that up and then getting any of those discretionary items, you know, you know, uh, you know family trips that have booked down the business cars car related expenses, um Uh, you know, I’ve seen, um, uh, I mean, college fees, country club memberships, all those types of things, uh, we call just cleaning up the books of the company.

It’s better to run [00:28:00] lean and mean, especially as you get closer to a potential exit. That’s great. Good point. Uh, Rob, talk to me a little bit about debt, right? Uh, Dave Ramsey says no debt, but if I’m a business owner and I’m looking to grow in anticipation of selling, um, is debt a good thing for me? Should I want some debt?

Should I get rid of debt before I start to get a valuation? What do I do with the debt? It’s interesting to see in the Carolinas, uh, especially is a lot of business owners being very debt averse. Uh, debt is not bad if debt is used correctly. Um, you know, obviously, um, you know, there are certain situations where companies become over leveraged and it starts to work against them.

But I think what business owners fail to realize is that debt is way cheaper than, Your equity, you know, [00:29:00] and it may not be clear, but if you think about. You know, cost of equity for a business is generally, you know, between 18 and 22%, let’s say, um, for for a middle market company, just the cost of equity and debt at 4, 5, 6.

7%, um, it. Generally a great vehicle to use to as leverage. And what I mean by that is if you can borrow and, and leverage new assets to, to organically grow the business. Then it is you’re doing it at a much cheaper rate You’re earning a greater rate of return than if you just use the cash out of the business And I know it seems weird or uncomfortable for some business owners, especially You know, sometimes I hear well rob I’ve got three million dollars of cash in XYZ Bank and I want to borrow this loan and they want me to personally guarantee the loan with the [00:30:00] cash I have in the bank.

I’m not borrowing my own money. Uh, yes, you are in a sense, but it does help you from a business standpoint, uh, to employ financial leverage, especially when it’s done in a prudent manner. Um, when you think about that. You mentioned, um, assets that weren’t being utilized appropriately. You think about not appropriately utilizing or leveraging debt.

When, when somebody comes in, a strategic buyer, financial buyer comes in and they look at the business and they see, I don’t want to say mismanagement, but under management of the resources of the business. Does that count against the business owner? Or does it or do they look at it and they kind of lick their chops and say man We can really make this thing hum a lot faster.

How do they look at some things like that? Well any any strategic type buyer? You know, like, you know, well, you know, just think of, you know, us as consumers, when we go out and we, we buy [00:31:00] goods and services, we’re trying to get the best price we can for the, for the value conveys to us. So, you know, uh, you know, a, a private equity or, or an industry participant that’s looking to, to purchase your business is doing the same thing.

And if they see things that are, I guess, um, quirky in nature or, or, uh, you know, not like they would expect to see them, uh, based on the average industry participant, they may start to use that as a negotiating advantage against you. Well, you know, John, you know, you’ve got a great company here, but your systems and processes are really, really bad, you know, and you know, while you’re, you’re commanding or asking X price, we really feel Y is more important because we’re going to have to come in and fix all these, these issues.

So you know, a potential buyer like that is looking to lower the [00:32:00] price, uh, and they’re going to point to anything that they view is. Uh, work that could be construed as potentially weak, uh, to hit you, hit your pain points, uh, to drive the price down. So Rob, I’ve decided that I want to exit, right? And I’ll do another three, maybe five years, uh, until I want to, to, to completely be gone.

I want to play some golf. What, uh, what, what issues? Should I address, what are the most important issues I guess I should address over the next three to five years leading up to itself? Well, real quick, um, you can’t do that because you can’t play golf, you have to find something else to do first and learn how to play golf.

That’s a hard lesson. Just understand that it takes time, and you know, one of the biggest things that we see business owners working through is Want to, who do I want to sell [00:33:00] my business to? There are, there are very few that are, that go, you know, I just want to be out. I want my proceeds and I want to be done.

I’m just going to sell through, you know, M& A or business broker and I’m going to be done. That’s typically. Uh, not how, uh, most business owners think most are, are on a journey to try to figure out how they want to, where they want to leave the business and what their legacy that they want it to be. So often what we see, you know, is it’s, it’s really typical.

Uh, for business owners to want to transact, uh, you know, uh, to insiders, you know, a management team, uh, coincidentally, what’s really interesting is that, you know, a lot of sons and daughters, they don’t want to be active in their parents business. They’ve either started their own business or, you know, they’ve, they’ve seen the way mom and dad have worked and they, they just don’t.

Want to continue for what, for that reason. [00:34:00] So the next choice is, well, my management team’s been with me 10, 15, 20 years. Maybe the management team, uh, will want to buy the business. All that typically happens is, is, you know, uh, it’s done typically at fair market value of financial buyer. It’s a business owner that’s not looking to get every dollar out of the business, but just wants a fair price.

And it’s structured in the sense that, you know, typically those managers, uh, don’t have the cash to, to purchase the business a hundred percent. It might be, well, we need you to have some skin in the game. So, you know, you gotta. You know, the five of you, you got to come up with 20 percent down and then the rest is structured as, as a note, as debt.

But what, in larger businesses, that really starts to be problematic. And the reason is, is that, you know, the cash, where are the cash flows going to come from to pay [00:35:00] down the notes? Well, typically it’s out of some type of bonus program that the business has, business owners, you know, uh, developed. To incentivize the management team and help them to purchase the business.

The problem that we see is that it just, it takes a long time. So the next, you know, stages, well, you know, maybe I should consider selling the business. And they might contract contact an industry participant, you know, they know, they’ve known. You know, they’re competitors for years and they might just go into a diner and sit down and say, hey, this is what’s going on and would you be interested in buying us?

And then they might think about that a little bit, but they might say, well, you know, maybe I should sell it to the employees. Um, and ultimately, um, it just takes time to work through that process. So while you’re working through just that. You know, again, you’ve got the [00:36:00] time of that, you’ve got the emotional component.

If you know your, your identity has been tied to the business, and, you know, You’re, you’re known in the community as being the CEO of your company and it. If you work really hard, um, you know, building the business, then, you know, the prospect of retirement can be something that you might not want to face.

We often see business owners kick this can down the road as long as they can, uh, a majority. So you want to be thinking about that aspect of it. Um, and, uh, You know, going, working, working from there to say, okay, well, while I’m working on these things, I also need to be putting my advisors in place. We need to start talking about these options and, and, and for both, even in terms of a [00:37:00] third party sale or an M& A set sale, you know, they say, well, the average sale takes, you know, six months.

What I can tell you from my experience is, is most go out 18 months. So you have to factor all these. Uh, considerations in between your accounting, your, your advisor, your personal and professional mindset, you know, where do you want to be, how you’re going to sell your company and how am I going to achieve that liquidity ahead of time to, to reach that goal.

That makes sense. Yeah. So Rob, you touched on this a little bit before, but. We all know that having a good business leadership team in place, right? In addition to yourself as the business center is huge. Because whoever’s buying the company, right, if, if I’m just leaving and exiting as the owner and I’m providing really the value for the business, having that leadership team that can take over and continue to provide, [00:38:00] you know, cash flow or profitability from the business, huge.

From the, the buyer standpoint, how do you quantify that in terms of the, the added value of the valuation of the business? Well, yeah, that’s a good question, and I guess, you know, part of it is recognizing that valuation professionals and MAA advisors and business brokers, we estimate value, and we do our best to estimate it.

But the reality is that the price for your business will be determined when the hammer hits. Drops, it’ll be determined when the market sets the price. So it’s good to have more than one buyer Sometimes it works when one buyer comes to the table and it’s very mutual, but it’s good to have at least three buyers Interested in your business so that you can command the market price Um, and the market will actually set the price Answer your question.[00:39:00]

Yeah, no, that makes sense um uh No, the question. No. Yeah, I have one more. Okay. Yeah. So from my background is more state plan, right? From an estate planning standpoint, my recommendation is, hey, if you’ve never had documents done, get your documents done. If you have had documents done, uh, at least take a look at the documents every 3 to 5 years, make sure that they’re still relevant.

Legislation changes, life changes, a lot of different things. Changes as from a business valuations standpoint. Do I need a certain event, right? I’m, I’m getting a succession plan done or I’m trying to sell. Do I need something like that to occur for me to have a business valuation to update? How often do I need to value my business?

Well, I guess what I would say is that, you know, if 60 or 70 percent or more of your, Wealth is in the value of your business And you’re [00:40:00] you know, you know 10 years from retirement. It is It’s it’s beneficial to get a valuation. So, you know where you stand today just in terms of the value because really all If it’s a major asset that all your plannings most of your uh Complicated planning or, or we’ll be around the business.

So, you know, if you get a valuation and it comes in at 20 million, then, you know, at least, you know, Hey, this is a starting point and it might be, well, Hey, I’ve grown the business far enough that if I had to leave today, that the, the value I could get for my business would support my, you know, um, My retirement, the way I want to live it or, or you might have to say, well, I’m at 20 million today and I need to get to 30 or 40 million and you need to start planning, uh, to enhance your value and get there.

Um, so certainly getting evaluation [00:41:00] earlier is good just to, to establish a foundation. Uh, for all the planning that you’re going to have to, uh, think about in the coming years, you know, how often do you need to get a business valuation after that? Well, it depends if you’ve had, you know, if you valued it, your businesses, you know, valued five years ago and your revenues have doubled, it’s probably a good idea to get a new valuation because it’s likely the valuation of your business has changed if you’re mature.

Stable relatively stable and you know, you grow around inflation Uh, but you’re good. Your cash flows are good. Well, you know, you’re you’re it’s probably less Of an issue to get a valuation Even though it’s five years old, you may say, well, it’s 10, maybe I’m like 12 or 13 million, but again, it really boils down to what you’re trying to accomplish.

Uh, are you starting to put your management team up? Are you going to incentivize management, [00:42:00] uh, through, you know, synthetic equity vehicles like stock appreciation rights, warrants options, so that, you know, they’re incentivized. Over the long term to remain at the company while you’re planning all these activities.

Well, then that’s going to require you to get a You know evaluation more frequently Yeah, no, so, um When we think about our industry, somebody asked us, what should I look for in a financial planner? And we talk about the only or this or that or those other components. So as we, you know, think today and talking to, you know, business owners on this side of this computer, besides middle aged Charlotteans who are Buffalo Bills fans, um, what should the, what are the common key characteristics that you would recommend business owners look for an evaluation expert like yourself?

Well, Certainly, um, certainly Bill’s fans, certainly Bill’s fans. [00:43:00] Well, you know, certainly experience in our industry matters. You know, I’ve been valuing companies for 25 years and I’ve valued well over 2, 000 companies in my career. And having experience and witnessing firsthand how business owners make and lose money is an important aspect.

To being realistic about, uh, the value of any business. Uh, so, you know, Generally, you know, I would say look for an accredited senior appraiser with the American Society of Appraisers, which is what we are, you know, ASA, uh, you know, a, uh, uh, uh, someone that’s accredited in business valuation by the American Institute of Certified Public Accountants or a chartered financial analyst.

Those are the only three that I would. You know, uh, say, are, are, uh, really heavy [00:44:00] in experience. Understand, too, that, you know, um, there’s that old adage in your life, you get what you pay for. Uh, there’s a lot of people offering valuations now. At rates that, uh, don’t make sense or they’re using some type of, uh, uh, valuation calculator.

I can tell you that I was involved in a situation with a business owner, uh, two business owners, one not getting along with the other. The business owner went to a, uh. Website is part of, of a valuation website, is part, part of their buy sell agreement. Input. The information came up with the value of the business, uh, and used that as their, as their negotiation, and it was probably 50% greater in value, what the business was actually worth.

Why? Well, it’s one thing to have access to a calculator. It’s another thing to know how the [00:45:00] information should be entered into the calculator. And I’ve seen seven, eight, 10 million swings in value with valuation calculators. So just understand the information is only as good as the people are putting the information in.

Uh, and they can create incredible problems. The other thing a valuation calculator is, so far, uh, Who knows with AI coming, but you know, evaluation calculator can’t take into account the facts and circumstances and solve the problems and think about the issues and how that impacts the result. So, um, certainly someone in certain industries, having somebody specific to your industry like, uh, you know, banking, uh, is very, uh, specialized, having an expert in banking, but most general, most other industries, or maybe oil and gas would be another one, uh, a very [00:46:00] specialized industry, but most other industries, manufacturing, you know, services, You know, tech distribution, transportation, professional services can be handled by a really good, uh, uh, uh, and experienced valuation professional.

Yeah, no, good point. Um, and Bill’s been right. Yeah. Um, so, hey, thanks for. You know coming and sitting down with us for a little bit today as we think about wrapping up and we’ve talked a little bit about valuation the process of selling the business and other things um We encourage business owners to get a valuation because of what you said, right?

It’s good to know what the business is worth. It’s good to know where it’s going It’s good for planning purposes and all these other things um, what’s to in your view, what’s the One of the more beneficial aspects to the business owner of getting a valuation today Um Well, again, I think it’s just reiterating that the [00:47:00] process takes time.

Um, I’ll give you two examples. Uh, uh, one really incredible gentleman, smart, uh, with a really smart. Business owner, um, had been working in his industry for decades. Um, I met him when he was 78 years old. He brought me in to do a simple valuation. Um, you know, he called me back six months later. Um, and we started talking about, he had a potential buyer.

Uh, it was one of his largest customers. Uh, we went through a couple rounds of that. Um, he considered, uh, you know, trying to bring in an outside, uh, president to run the business. Uh, went through a couple of those. And ultimately, it was 82 years old. And we, we, we, uh, helped him to, uh, establish. Uh, an ESOP and sell it to the employees in another [00:48:00] situation.

I wasn’t in recently. I just met a gentleman. I talked with him in. 2020 at the height of cobit at that time, he was. 78 years old, um, he’s now 82 years old. Um. We’re trying to keep him moving with his exit planning. Um, but. Um, he still hasn’t been able to come to terms with, um, you know, letting going and letting go of the business and retiring.

That’s ongoing. And I can say in the latter case of that, it’s likely that, um, he will pass away before the business is sold. And that’s not a situation you want to be in, you know, then, you know, it’s gonna, it’s gonna fall to your family. Uh, to, uh, you know, come in and try to [00:49:00] fix the situation, whether that be through the continued operations or, um, you know, uh, the getting it sold.

And it, it can really be a cumbersome process. And in the interim, what it could impact the value of the business, uh, simply if it’s known in the marketplace that, you know, uh, Joe’s passed away, Hey, there’s an opportunity here. It becomes a, a, a potentially, uh, discounted sale. Um, So, um, to make light of the situation really quick, maybe if you have a poor golf game like John over here, you should hold on to the business for a long time.

That way you don’t have to go, uh, chase golf balls around the golf course, right? Yeah, absolutely. I mean, I could tell story after story of just situations where, you know, I’m working with another business owner, uh, Their business five years ago was worth double, they’ve had to reduce [00:50:00] headcount by half, and that person really wanted to retire.

And now what do you do? Uh, you either have to sell it, you’re not going to maximize your value on Exeter, you’re going to have to work five to seven years longer. To be able to get back where you were, uh, and that just happens to be, uh, a business that’s, uh, uh, sensitive to changes in market conditions. It had nothing to do with their, their, uh, their performance.

It all had to do with just changes in market conditions. So would you say that’s helpful right there then, Rob? More frequently you get your business value the more you understand what your business is worth and maybe that’s a potential opportunity for you to recognize hey now is the right time for me to exit out of this business because it’s valuable here or it’s valued here.

Um, I know where it is. I know what it needs to get it to the next level, and I’m not ready to make that next five year commitment. Is that a certain benefit of it? Oh, no, certainly it’s, it’s a benefit [00:51:00] to getting a business valuation. Again, it drives, it drives a business owner’s thought process, and this is where we are today.

This is what we’re worth. These are our strengths. We, we, this is opportunities, threats that we face and when is the optimal time to exit it, you know, I, I know some individuals, uh, that are very big into investing in cryptocurrency. And cryptocurrency is very volatile and they’re always chasing. Well, you know, I’m up 300%.

I just need to be up a little bit more. And, you know, you can get on the hamster wheel trying to chase value. And sometimes it’s just better to know, Hey, the last seven years, I doubled the value of the business now is the time to go because what’s going to happen. Uh, you know, for instance, uh, you know, we’ve been stimulating the economy since 2008 and 2009.

Um, you know, we hit first, we were hit with the 08, 09 market crash [00:52:00] and then COVID. You know, uh, 19 impacted us and then we even had to, you know, uh, stimulate the economy coming out of COVID, uh, and, you know, on average, we have a recession every, you know, seven to nine years on what year are we on nine or 10 and we haven’t had a recession yet.

Well, at some point we’re gonna have a recession. We hope it’s a mild recession, but it’s more likely than not we’re gonna have an economic recession. So you may be in a situation today saying, Hey, my business has got great value. I should go now, rather than the two, two years from now that I’ve been thinking about to avoid that market of that potential.

Uh, downturn in the market, which could impact the value of the business. And that frequent valuation gives them that knowledge of, hey, the business is now worth, rather than the assumption of, I think it should be worth, or somebody said it is worth, or, or, um, I read in a newspaper clipping that that business was worth that, and [00:53:00] therefore my business is, too.

Getting an actual valuation gives them that direction. Yes, so, uh, well, Rob, thanks again for, um, for joining us, Caitlin, um, opening up for questions. I don’t know if anybody’s chatted questions along the way or if everybody’s been calm and polite. Um, if you want to unmute yourself, um, and ask the question, can we do that too?

Yeah, and if you feel more comfortable throwing it in the chat, please do. What is a typical cost and duration of a valuation? Uh, you know, again, it depends on the facts and circumstances. You know, um, you know, there are different types of valuation reports. There’s what we would call, you know, a full valuation report where we’re talking about the history, the operations, the finances, the economic and market outlook.

You know, and what’s the financial performance? How does that financial performance of the business benchmark against its industry peers? We take all this information and we synthesize [00:54:00] it into what we believe the value of the business is going to be. That can range from, you know.

You know, it could be 10,000 to 50 plus thousand dollars, uh, you know, a typical business around 15 to 25 million in revenues prior around $10,000. But again, it depends on, you know, how many methods are we gonna need to value the business? What are the potential? Are there any potential non-operating assets?

Do we have to consider? What is the capital structure of the business? Is it relatively straightforward? Is it just one class of common stock or do we have a complex capital structure? And all these things will, will, uh, you know, culminate in what the real price is for restrictive report. Uh, we consider all the exact same information and generally for a same size company, generally in the range of seven to 9, 000.

But again, they can go up, you [00:55:00] know, I’ve done, you know, I’ve done valuations for, you know, 9, 000 and I’ve done them for over 100, 000, uh, with multiple entities, you know, so it just depends, but I would say a good range is, you know, maybe 10 to 12 on a full report for a mid, you know, small to mid, mid sized company, and maybe 7 to 9 on a restricted report.

Both of those are signed opinions. There is a version of a report out there called a, uh, Calculation of Value. Uh, this is put out by the AICPA, and a Calculation of Value is the appraiser and the business owner are going to get together, and we’re going to agree upon the methods, and we’re going to calculate the value.

Well, We don’t do calculations of value. We rather do restricted reports and sign our name to our opinions and say this is our, our professional opinion on an estimate of the value of the business. A calculation of value is simply that. It’s [00:56:00] a calculated value and it can be, it can be right, wrong, or, you know, and so we don’t, we don’t issue calculation of values.

They do have their place, but I, I don’t think it. They can be problematic in an exit planning situation. So I know you’re going to say it depends, but start to, to end of getting that value, how long does that typically take? Generally in a, in a, uh, uh, It takes four to six weeks, uh, from the time we collect the information we need to get started.

The whole process is about four to six weeks. I would say right now the height to state planning, we’re running about six to eight weeks. And expect that to maybe even going to ten weeks as we get into 2025. So, um, stay on that note for a second. Assume that the process is. business owner you [00:57:00] meet, kind of first meeting, idea of what the business is, and then they provide you with paperwork, and then you provide a quote for them, what it would cost to do the valuation.

Is that generally speaking correct? Usually it starts with an initial call to find out what’s driving the need for the business valuation, and we talk about the company a little bit, and, and just, uh, you know, uh, the facts and circumstances surrounding, you know, the need, um, you know, we If the business owner wants to move forward, what we do is we issue an engagement letter and there’s a retainer.

Um, uh, uh, and once we have those two items, uh, we, we get a information request out of this. These are all the items that we need, um, uh, to value the business. Um, again, we ask for a lot of information, um, you know, so that we can learn what you know about the business. And then again, it starts after we have the information, we set up a management call.[00:58:00]

Uh, to discuss the business and the, you know, the financial statements further and once, uh, and to, to make sure we’ve got all the information we need, we may have some follow up, uh, information that we need to request. After we do that, we issue a draft report. And, um, there’s generally one or two ways.

Either the client looks at it says, yeah, that’s exactly what I thought and things look great. The other might say, hey, uh, do you want to get on a call? And so we can discuss this further and we will, we’ll take them through the report and explain my value to the company the way we did. Um, and once we’re wrapped up, we issue the final to electronic, we sign it and that’s pretty much the entire process.

Start to finish. Okay, great. Thanks. Hey, Rob. Um, what is the general minimum level of revenue and or EBITDA that your level of valuation, um, That is appropriate for your valuation? Well, what [00:59:00] I would say is that, um, we valued all the way down to Main Street businesses that were under a million dollars in revenue.

Um, we don’t do a lot of Main Street businesses, um, mainly because, um, Uh, it’s not always cost beneficial to the business owner to have us value a Main Street business. Um, we’re generally more suited for businesses 5 million in revenue up to 500 million in revenue. Um, but there are situations like, for instance, we, we, uh, we work in family law and they need, uh, a very small business valued and we value them for that purpose.

And in that case, it makes sense to spend money with us to value a business. given that purpose, but the best way to have very small businesses value to really, to really go to a business broker where the sales are occurring, uh, more frequently because the smallest main street [01:00:00] businesses are sometimes the most hard business to value, uh, because the information’s limited and it’s essentially, um, a lot of small businesses is it’s your, your, Business is your work.

You have your business established to earn a living. Um, and so there may not be much value past, uh, what you’re paying yourself in salary. And compensation to 500 to 500, 000 to 1, 000, 000 in revenue, kind of that classic business broker is going to get. Yeah, they’re going to, they’re going to do a much better job.

One to 5 million is going to be situationally dependent whether or not it’s worthwhile having it. And then once you get over 5 million, it becomes pretty, um, pretty normal, pretty relevant. Yeah. Thanks Mike. I like y’all man. Okay. Yeah, yeah. Um, so you might take the one to five million dollar business and say, Hey, look, spend it once.

Um, and then probably don’t do it again for another five. Get yourself your benchmark point for where you are now and then try to get further along down the path and come back in five or six years [01:01:00] and get another valuation and see where you made it. Yeah. Yeah. Certainly we’ll value, uh, any business. And I’m, I’m very candid when a business owner calls me, I say, look, this is what it’s going to cost you.

Uh, to valued businesses with us, but if you don’t need this right now, you’re better off going over here and you’re going to save, um, you know, uh, you know, uh, uh, for instance, or, you know, just, you know, our standard hourly rates for managing directors of 350 an hour. Our senior staff are 250 an hour and our junior staff is 150 an hour.

So you have to be in a situation where. Um, it’s beneficial and to pay those amounts, uh, in support of the opinion for the need. I mean, if there’s time left, I’ll, I’ll take some questions out here right now. Thanks. That was my question. Pretty small, but you kind of mentioned like [01:02:00] mainstream is going out to brokers.

So shameless. Any kind of contextual things that you can just. I’m going to ask you to just elaborate on people when you’re dealing with brokers of like test questions and how to, you know, validate them, verify them, vet them because there’s a wide range and a lot of industry reputation on those folks.

Or is that too, too hard of a softball question? It is a different, it is a very difficult question, but I know exactly what you’re saying. And, and, um. I’ve run into this situation, um, we have very good business brokers in general, uh, in Charlotte. Uh, when you get outside, uh, uh, uh, of North, well, at least Charlotte, and even in Raleigh, we have some good brokers, uh, it gets a little bit more difficult, I guess, um, you know, How would I do this?

You know, certainly I want to know their experience. Understand that when you [01:03:00] do get what’s called a broker opinion, a broker of opinion of value, a broker opinion of value, that, um, you know, it’s not a, it’s not a professional business valuation. It’s, it’s, they’re looking at transactions. Um, and often they’re, they’re looking at what an SBA lender would be able to finance, provide financing for.

But the ultimate goal of a business broker is to sell the business. So you might get a free valuation or they might charge 15 to 2, 500, uh, but it can be very challenging to. Um, identify which broker to use and which broker not to, and the best thing I can tell you is that talk to your other professional advisors that you trust and say, well, that’d be your wealth advisor, your [01:04:00] CPA, you know, and say, who would you recommend and why?

And then I would interview two or three before I selected one. Um, but it’s really interesting. You know, I was in a situation where I was valuing a business in Florida and it was a high cash flowing business, but the broker was arguing why I can’t get the business financed for that rate. And they were basically lowering the value of the business to meet the SBA loan guideline.

So be aware that that can happen too, but in certain businesses that might be. What you need to do to sell. That’s tough. It’s tough. Yeah. I’ve never heard of a broker reducing the price to accelerate a transaction before. Oh, sorry. Yes, uh, you know, if you understand how brokers and, you know, like I said, they’re [01:05:00] really excellent brokers out, but understand that brokers are 10.

99. They’re, they’re, they’re not W 2 employees, so their compensation is driven on deal activity. So their goal is I want to maximize value but at the fastest possible transaction so that I can, I can be paid. And so it becomes a competing issue and that, uh, is, is that broker working in my best interest?

Um, I’ve seen good and I’ve seen bad, so it’s, it’s a tough, it, I, I, it’s tough to give real, any really good guidance other than, um, understanding that broker’s reputation and getting the recommendations of your other trusted professionals.